UNIT III of Industrial Managent

8/13/2019 UNIT III of Industrial Managent

1/24MRS SABITA SINGH (LECTURER- MBA)

UNIT III

INVENTORY

Inventory is the stock of any item or resource used in an organization for manufacturing or sale purpose.

In a wider sense, inventory can be defined as an idle resource which has an economic value. It is however,

commonly used to indicate various items of stores kept in stock in order to meet future demands.

In any organization, there may be following four types of inventory:(a) Raw materials & parts-- These may include all raw materials, components and assemblies used in the

manufacture of a product;

(b) Consumables & Spares -- These may include materials required for maintenance and day-to-day operation;

(c) Work in progress -- These are items under various stages of production not yet converted as finished goods;

(d) Finished Products -- Finished goods not yet sold or put into use.

TYPES OF INVENTORY

(A) According to Nature of Material:

(I) Direct Material:-

1. Raw materials (Production Inventory):Everything the Manufacturers buy to make the product isclassified as raw materials. The raw material inventory only includes items that have not yet been put intothe production process. The purpose of holding these materials is to ensure uninterrupted production

process. Raw materials may also include partially finished goods or materials. For example,for an

orange juice company: oranges, sugar and preservatives are raw materials, while for a computer

manufacturer : chips, circuit boards and diodes are raw materials.

2. Work -in -progress: -work-in-process inventory include partially assembled items that are waiting to becompleted. Work-in-process inventory items may include finished goods that have not yet been packaged

and inspected, as well as raw materials that have moved from storage to a preassembly area. For

example,in an orange juice company, the oranges may come in to a storage area, where they are raw

goods, but once they have been moved out of the storage area and onto the assembly line for juicing, they

become work-in-process inventory.

Nature of material Uses of material

INVENTORY

Direct material Indirect material



3. Finished goods: -Finished goods are any products that are ready to be shipped out or sold directly tocustomers, including to wholesalers and retailers. Finished goods may be waiting in a storage area or on a

shop floor. If the amount of inventory of finished goods increases faster that the amount of raw goods and

work-in-process goods, then production may need to slow down until more finished goods are sold.

(II) Indirect Material:-

These materials in the inventory are required for manufacturing process but do not undergo transformation in

process. Example of such inventories include;-

1. MRO Inventory:- Maintenance, repair and operating inventory are used for production but do not become apart of the product are called MRO inventory. E.g. lubricating oil, old cloth, machine spare parts etc.

2. Consumables:- Consumables are products that are required recurrently, i.e. items which are discarded . E.g.Ink ,cartridges, paper, pens, file, folders, fax machine, etc.

(A) According to Use of Material:

1. Transaction inventory :- Transaction inventory also known as Pipeline inventory which is refer to thosegoods that have left firms warehouse but are still in company's distribution chain as they are yet to be

bought by ultimate consumers. Eg:The inventory with flipkart which is still to be delivered but has left

their warehouse is considered as Pipeline inventory.

2. Cycle inventory: Cycle inventoryoccurs because one or more stages in the process cannot supply all theitems it produces simultaneously. This type of inventory only results from the need to produce products in

batches and the amount of it depends on volume decisions.

3. Anticipation inventory: inventory that is accumulated to cope with expected future demand orinterruptions in supply.

4. Buffer inventory: also referred to as safety inventory, its purpose is to compensate for unexpectedfluctuations in supply and demand.

NEED FOR INVENTORY/ MOTIVE TO HOLD INVENTORY

1. Transaction Motive:The Company may be required to hold the inventory in order to facilitate thesmooth and uninterrupted production and sale operations. It may not be possible for the company to

procure the raw material whenever necessary. There may be a time lag between the demand for the

material and its supply. Hence it is needed to hold the raw material inventory. Similarly it may not be

possible to produce the goods immediately after they are demanded by the customers. Hence it is needed

to hold the finished goods inventory. They need to hold work in progress may arise due to production

cycle.

2. Precaution Motive:The Company hold the inventory to guard against risk of unpredictable changes indemand and supply forces. E.g. the supply of raw material may get delayed due to factors like strike,



transport, disruption, short supply, lengthy processes involved in import of raw material etc. hence the

company should maintain sufficient level of inventory to take care of such situations. Similarly, the

demand for finished goods may suddenly increase (especially in case of seasonal type of products) and if

the company is unable to supply them, it may mean gain of competition. Hence, company will like to

maintain sufficient supply of finished goods.

3. Speculative Motive:The Company may like to purchase and stock the inventory in the quantity which ismore than needed for production and sales purpose. This may be with the intention to get advantage in

term of quantity discounts connected with bulk purchasing or anticipating price rise.

Hedging against price increaseBusinesses usually hold inventory to avoid from the ever fluctuating market price of inventories.

Thus, by having efficient and good inventory system, businesses can control their inventory cost.

Getting quality discountswhen businesses have inventory in store, they can get quality discounts because they know which

goods and services to buy from the suppliers and manufacturers. It helps to learn where to get

better deals than no deal at all.

VARIOUS LEVELS OF MATERIALS

In order to ensure that the optimum quantity of materials is purchased stocked neither less nor more, the store

keeper applies scientific techniques of material management. These levels are not permanent but require revision

according to the change in the factors which determine these levels.

The following levels are generally fixed.

(a) Maximum Level

(b) Minimum Level

(c) Average Level

(d) Re-order Level

(e) Danger Level

(a) Maximum Level:

The maximum level is that level of stock which can be held at any time. In other words, it is the level beyond

which stock should not be maintained. The purpose is to avoid over-stocking .This level is fixed after taking into

account the following factors:

(i) Rate of consumption

(ii) Lead time(iii) Availability of capital

(iv) Storage capacity

(v) Cost of maintaining stores including insurance cost



(vi) Nature of commodity

(vii) Possibility of price fluctuation

(viii) Possibility of change in fashion, habit, etc.

(ix) Restrictions imposed by Govt., local authority or trade associations

(x) Re-order level it

(xi) Re-order quantity

Maximum Level =Re-order level + Re-order Quantity - (Minimum consumption x Minimum Re-order period)

Or

Maximum Level =Re-order level + Re-order Quantity - (average rate of usage x Lead time)

(b) Minimum Level:

This is the level below which the stock of an item should not fall. This is known as safety or buffer stock. An

enterprise must maintain minimum quantity of stock so that the production is not hampered due to non-

availability of materials.

This level is fixed after considering the following factors:

(i) Re-order level

(ii) Lead time

(iii) Rate of consumption

The formula for calculating minimum level is:

Minimum level =Re-order level - (Normal consumption x Normal Re-order period (i.e. lead time))

(c) Average Level:

Average Level= (Maximum level + Minimum level Average level )/2

Or

Average level =Minimum level + Re-order Quantity/2

(d) Re-order level

This level is that level of material at which it is necessary to initiate purchase requisition for fresh supplies. This

is normally the point lying between the maximum and the minimum levels. Fresh orders must be placed before

the actual stocks touch the minimum level.

The following factors are taken into account for fixing the Re-order level:

(i) Rate of consumption of material

(ii) Lead time, i.e., time required to receive the delivery of fresh purchase.

(iii) Re-order quantity

(iv) Minimum level

Re-order level =Minimum level + consumption during period required to get fresh delivery

Or

Re-order level =Maximum consumption x Maximum Re-order Period



(e) Danger Level:

Usually stock should not be lower than the minimum level. But if for any reason, stock comes down below the

minimum level, it is called danger level.

When the stock reaches danger level, it is necessary to take urgent action on the part of the management for

immediate replenishment of stock to prevent stock-out situation.Danger Level =Average consumption x Maximum Re-order period for emergency purchases

INVENTORY CONTROL TECHNIQUE / INVENTORY CLASSIFICATION

TECHNIQUE / TYPES OF INVENTORY ANALYSIS

1. ABC Analysis (always better control)

This technique of inventory control is also known as Always Better Control technique. ABC analysis is ananalytical method of control which aims at concentrating efforts on those areas where attention is needed most.

Materials having higher values but constitute small percentage of total items, are grouped in 'A' category. On the

other hand, a large percentage of items of materials which represent a smaller percentage of the values, are

grouped in 'C' category. Items of materials having moderate value 'and moderate size are grouped in 'B' category.

100

90

80

70

60

50

Value of item (%) 40 C

30

20 B

10 A

0 10 20 30 40 50 60 70 80 90 100

Number of items (%)

After the items of materials are classified into A, B and C category, control can be exercised in a selective

manner as follows:

Category Number of Items (%) Value if items (%)

A 10 70

B 20 20

C 70 10



(i) Category A: This category includes 10% of total material, but its cost will be high, so its investment

requirement will also be very high and it may be 70% of total investment in inventory. So, Greater care and strict

control should be exercised on the items of category 'A' as any loss or breakage or wastage of any item of this

category many prove to be very costly

(ii) Category B:This category includes 20% of material and requires 20% of total investment in this type of

inventory for buying. Moderate and relaxed control is required for the items of category 'B'.

(iii) Category C:This category includes 70% of total material but cost is 10% of total investment in inventory.

There is not much need for exercising control over the items of category 'C' Periodic or annual verification is

required for this category of materials.

Advantages of ABC Analysis:

1. Close and strict control of costly items is ensured.2. Investment in inventory can be regulated and funds can be utilised in the, best possible way.3. Economy is achieved in respect of stock carrying cost.4. It helps to keep enough safely stock for 'C' category items.5. Clerical cost can be reduced and inventory is maintained at optimum level.6. Scientific and selective control helps in maintenance of high stock turnover rate.

ABC analysis is that technique of material control in which we divide our material into three categories and

investment is done according to the value and nature of that categorys materials.

Conclusion:-

- The A segments represent approximately 70% of the total spend within a category - High attention

- The B segments represent the following 20% of the total spend within a category - Normal attention

- The C segments are the remaining (most of the time several segments) which Represents the final 10% of the

total spend -Low attention

2. VED Analysis (Vital, Essential, and Desirable)

The analysis classifies items on the basis of their criticality for the industry or company.The degree of criticalitycan be stated as whether the material is vital to the process of production, or essential to the process of

production or desirable for the process of production.

Vital:Vital category items are those items without which the production activities or any other activity of the

company, would come to a halt, or at least be drastically affected.

Essential:Essential items are those items whose stockout cost is very high for the company by adversely

affecting the production.

Desirable:Desirable items are those items whose stock-out or shortage causes only a minor disruption for a

short duration in the production schedule. The cost incurred is very nominal.



VED Analysis is very useful to categorize items of spare parts and components. In fact, in the inventory control

of spare parts and components it is advisable, for the organization to use a combination of ABC and VED

Analysis. Such control system would be found to be more effective and meaningful.

3. FSN Analysis (Fast moving, Slow moving and Non moving items)

Classification based on frequency of issues and uses

Fast Moving (F) = Items that are frequently issued/used

Slow Moving (S) = Items that are issued/used less for certain period of time

Non-Moving (N) = Items that are not issued/used for more than certain duration

This type of classification helps to establish and organize proper warehouse layout by locating all the fast moving

items near the dispensing window to reduce the handling efforts. Also, attention of the management is focused on

the Non-Moving items to enable decision as to whether they are in needs in the future or they can be salvaged or

disposed. This will help to improve organizations capital utilization and cash flow.

4. HML Analysis: ( High cost, Medium cost, Low cost)

Classification based on unit price:

This classification is as follows:

High Cost (H) = Item whose unit value is very high

Medium Cost (M) = Item whose unit value is of medium value

Low Cost (L) = Item whose unit value is low

This type of classification helps in implementing proper control such as authorization, expiry management;

identify opportunity to find out a less expensive substitute.

Procurement department is more concerned with prices of materials so this analysis helps them to takethem the decisions such as, who will procure what based on the hierarchy and price of material

Authorization to draw materials from the stores will be given to senior staff for H item Next lower level in seniority for M class item Junior level staff for L class items

5. SDE Analysis: (Scares, Difficult, Easy)

Classification based on the Scarcity and lead time:

Scarce (S) = Items which are imported and require longer lead time

Difficult (D) = Items which require more than a fortnight but less than 6 months lead time.

Easily available (E) = Items which are easily available

This type of classification helps in reducing the lead time required at least in case of vital and essential items.

Ultimately, this will reduce stock-out costs in case of stock-outs.



S Class Materials:These materials are always in shortage and difficult in procurement. These materialssometimes require government approvals, procurement through government agencies. Normally one has

to make the payment in advance for sourcing these materials. Purchase policies are very liberal for such

materials

D Class Materials:These materials though not easy to procure but are available at a longer lead timesand source of supply may be very far from the consumption. Procurement of these materials requires

planning and scheduling in advance.

E Class Materials : These materials are normally standard items and easily available in the market andcan be purchased anytime.

6. XYZ Analysis:

XYZ analysis is calculated by dividing an item's current stock value by the total stock value of the stores.

The items are first sorted on descending order of their current stock value.

Whose inventory value is high are, classed under X items. Those with low investment in them are termed as Z items. Items whose inventory value is neither too high or neither too low is classed as Z items

Through this analysis, you can reduce your money locked up by keeping as little as possible of these expensive

items.

7. SOS Analysis: (Seasonal, Off Seasonal)

S- For seasonal Materials

OS - For non-seasonal Materials

Purchase planning has to be done if the material is seasonal as material shall be available for a particular time

period of the year.

Seasonal Items can be further classified into two groups

1.Some products are seasonal and only available for that season only.

E.g. :- Leechee is seasonal fruit which is available only for one month in year. If any Juice and pulp company

wants to buy this fruit then the procurement department shall have to plan in advance the requirement and

procurement job becomes concentrated only for one month. Other than this issue, storage is also a big

problem as the plan is consume is throughout the year while the buying time available is only one month.

2.Some materials are seasonal but are available throughout the year such as grains, and other non perishable

items. These items are bought during season and these items are cheaply available during season. The company

can take the advantage of economies of scale in buying these materials in bulk. But at the same time the

inventory carrying cost should not go beyond the profit margins while holding the large inventory



Non-seasonal materials are available throughout the year without any significant price variation.

Non seasonal items can be Plastics, Metals etc. The prices of these materials are independent of the season

INVENTORY COSTS

Inventory costs are basically categorized into Four headings:

1. Purchase cost2. Ordering Cost3. Carrying Cost4. Shortage or stock out Cost & Cost of Replenishment

a. Cost of Loss, pilferage, shrinkage and obsolescence etc.b. Cost of Logisticsc. Sales Discounts, Volume discounts and other related costs.

1. Purchase Cost:This refers to nominal cost of inventory. It is the purchase price for the items that are bought from outside

sources, and the product cost if the items are produced within the organisation. This may be constant per units, to

it may vary as the quantity purchased/ produces increases or decreases. Quite often, situation are found when it

may be stipulated that. Eg if unit price of an order is Rs 20 for an order up to 100 Units and Rs 19 if the order is

for more that 100 units.

2. Ordering CostOrdering Cost is dependant and varies based on two factors - The cost of ordering excess and the Cost of

ordering too less.

Both these factors move in opposite directions to each other.

Ordering excess quantity will result in carrying cost of inventory. Ordering less will result in increase of replenishment cost and ordering costs.

This functional analysis and cost implications form the basis of determining the Inventory Procurement decision

by answering the two basic fundamental questions - How Much to Order and When to Order.

How much to order is determined by arriving at the Economic Order Quantity or EOQ.

3. Stock out cost:-This sock out cost means the cost associated with not serving the customers .stock outs implies shortage. If the

stock out is internal (i.e. in the production system) it would imply that some production is lost, resulting in ideal

time for men and machines, or that the work is delayed which might attract some penalty. While if the stock out

is external, it would result in a loss of potential sales and/ or loss of customer goodwill. It would result in a

backorder or a lost sale.



4. Carrying Cost

Economic Order Quantity (EOQ)

The economic order quantity, known as EOQ, represents the most favourable quantity to be ordered each time

fresh orders are placed.

The quantity to be ordered is called economic order quantity because the purchase of this size of material is most

economical. It is helpful to determine in advance as to how much should one buy when the stock level reaches

the re-order level. Because:

If large quantities are purchased, the carrying costs would be large. On the other hand; if small quantities are purchased at frequent intervals the ordering costs would be

high.

The economic order quantity is fixed at such a level as to minimise the cost of ordering and carrying thestock. It is the size of the order which produces the lowest cost of material ordered.

While determining the economic order quantity, the following three cost factors are taken into consideration:

(i) The cost of the material

(ii) The inventory carrying cost

(iii) The ordering cost

Inventory

carrying cost

Direct Cost

Indirect

Costs

Capital

costs

Service

costs

Risk costs

Storage

space costs

Business risk

Opportunity

costs

Incremental

increases in

infrastructure

costs

Inventory investment

Facilities: Raw-materials,

Work-in -progress,

finished goods .

Inventory insurance

Obsolescence

Damage

Shrinkage

Loss sales and loss of

customers

Inability to invest in

alternative

Facilities

Trans ortation

Service companies



Carrying costsare the costs of holding the inventory in the stores. These are:

(i) Rent for the storage space.

(ii) Salaries and wages of the employees engaged in store keeping department.

(iii) Loss due to pilferage and deterioration.

(iv) Insurance charges.

(v) Stationery used in the stores.

(vi) Loss of interest on the capital locked up in materials.

Ordering costsare the costs of placing orders for the purchase of materials. These are:

(i) Salaries and wages of the employees engaged in purchasing department.

(ii) Stationary, postage, telephone expenses, etc. of the purchasing department.

(iii) Depreciation on equipments and furniture used by the purchasing department.

(iv) Rent for the space used by the purchasing department.

For determination of Economic Order Quantity

While placing orders for purchasing materials, the total cost to be incurred is kept in view. If an order is placed for a large quantity at a time, the ordering cost is less but the carrying cost would be

more.

If orders are placed for small quantities, the ordering cost is more but the carrying cost would be less. Thus the economic order quantity is determined at a point when the ordering costs and the carrying costs

are equal. Only at this stage the total of ordering cost and carrying cost is minimum.

Annual total cost curve

Annual inventory carrying cost

C

Cost of inventory EOQ

Annual ordering cost curve

Q Order quantity



INVENTORY CONTROL MODELS

INVENTORY MODELS

Deterministic inventory control

These items are based on the assumption that demand as well as lead time of items is known with certainty. In

this model there is no need to maintain any extra stock because the supplies are assumed to arrive the moment

the stock level reduces to zero. Hence there is no stock out unless they are intentionally allowed to occur.

MODEL -I EOQ model (No Shortage is allowed)

This model for determining EOQ is based on following Assumptions .

(a) Demand is known and constant.

(b) The lead time, the time between the placement of order and the receipt of the order, is known and constant.

(c) The receipt of inventory is instantaneous.

(d) Quantity discounts are not possible.

(e) The only variable costs are the ordering cost and the holding or carrying cost.

(f) Orders are placed so that stock outs or shortages are avoided completely.

Let ,

D = Annual order per year (Demand)

Q = quantity of product ordered each time

C = Cost of carrying one unit of inventory for one year

O = Average cost of completing an order for a product (ordering cost)

Now ,

(a) Annual carrying cost = Average Inventory level x Carrying cost

= Q xC2

(b) Annual Ordering cost = Order per year x Ordering cost

= D x OQ

(c) Total Annual stocking cost= Annual carrying cost +Annual ordering cost= Q C + D O

2 Q

(d) Average Inventory level= Maximum inventory + minimum inventory

Static inventory models Dynamic Inventory models

Deterministic

Models

Probabilistic

Models



2

In the model safety (minimum level) is not required, minimum level is zero.

= (Q +0)/2 = Q/2

(e) To get optimum quantity, the total stock cost should be minimum, which is possible when,

Minimum level = safety stock Maximum level = Minimum level + EOQ Reorder level = Minimum level + consumption during Lead Time.

Inventory Levels

Maximum Inventory level

Average inventory level

Q Re-order point

OP Re-order level

Time(days)

LT LT LT

Re-order cycle

EOQ = 2 DOC

Economic order quanti tyis the level of inventory that minimizes the total inventory holding costs and ordering

costs. This model is also known as a fixed order quantity model because the quantity ordered (EOQ) does not

change unless the parameters of the model change.

Example 1: ABC cooperation has annual demand at 10,000 units per year. The cost per unit is Rs2 and Rs 36 to

place an order. The inventory carrying cost is estimated at 9% of average inventory determine EOQ , Number of

order per year, Total cost.

Receive an order Q

Start using the Inventory

When you reach to re-

order level you place a

fresh order of Q size

The cycle repeats



Solution:

D= 10,000

O=36

C = 2x9%= 2x 0.09= 0.18

EOQ = Q= 2 DOC

2x10000x36

0.18

= 2000 units

No. of order = D/Q

= 10,000/2000

= 5 units

Total cost = DO/Q + QC/2

10,000x36+ 2000x0.18

2000 2

= 180 + 180

= 360 Rs per annum

Example 2:Calculate Economic Order Quantity and total cost of inventory for an industry whose annual

consumption of an item is 15,000 units. The ordering cost is Rs 20 per order, inventory carrying cost is Rs 2 per

unit per year.

Solution:

D= 15,000

O=20

C = 2

EOQ = Q= 2 DO

C

2x15000x20

2

= 574.7 units

No. of order = D/Q

= 15,000/574.7

= 26.1 units

Total cost = DO/Q + QC/2

15,000x20+ 574.7x2 = 522+575

574.7 2

= 1097 Rs per annum



MODEL -II EOQ model (With stock outs or shortage is allowed)


(a) Demand is known and constant.

(b) The lead time, the time between the placement of order and the receipt of the order, is not known.

(c) The receipt of inventory is instantaneous.

(d) Quantity discounts are not possible.(e) The only variable costs are the ordering cost and the holding or carrying cost.

(f) All cost and time are variant.

Inventory Levels

Re-order point Maximum Inventory level

I Average inventory level

Q

OP Re-order level

Shortage

Time(days)

D = Annual order per year (Demand)

Q = quantity of product ordered each time

C = Cost of carrying one unit of inventory for one year

O = Average cost of completing an order for a product (ordering cost)

Here, Q= I+S

i.e., I = inventory level

S= Shortage level

Total variable cost = annual (ordering cost+ carrying cost+ shortage cost)

= OD + I2

C + (Q-I)2

SQ 2Q 2Q

EOQ = 2 OD O +C

C S

MODEL -III EOQ model (With Risk)


(a) Demand is not known it is fluctuating.

(b) The lead time, the time between the placement of order and the receipt of the order, is not known.

(e) The only variable costs are the ordering cost and the holding or carrying cost.

(f) All cost and time are variant.



Inventory Levels

Re-order point Maximum Inventory level

Average inventory level

Q

OP Re-order level

R Reserve stock (safety stock)

Time(days)

Used during demand fluctuation

Safety stock can be defined as the difference between the reorder level and average lead time demand.Therefore if re-order level is raised, the safety stock is increased and chance of stock out in any cycle

decreases.

In the above model, the first cycle shows normal demand and the next cycle show fluctuation indemand. Due to which the safety stock is used.

Safety Stock

Safety stock(also called buffer stock) normally required by companies to ensure that they have sufficient

quantities of material in stock so that they can eliminate risk of stock outs (shortfall in raw material or packaging)

due to uncertainties in supply and demand.

Reasons to hold safety stocks:

1) Safety stock is held when there is uncertainty in the demand level or lead time for the product; it serves asan insurance against stock outs.

2) The safety stock is to provide coverage for unexpected customer demand, damage in the warehouse orrequired due to quality issues found in production.

3) Safety stocks are mainly used in a "Make To Stock" manufacturing strategy. This strategy is employedwhen the lead time of manufacturing is too long to satisfy the customer demand at the right cost/ quality/waiting time.

4) By creating a safety stock, we can also prevent stock-outs from other variations : An upward trend in the demand A problem in the incoming product flow (machinery breakdown, supplies delayed, strike, ...)

However, there are situations where companies do not require inventory to be in stock. This situation is known as

out of stock situation. It is beneficial to companies when the company has no demand for certain items andzero inventories means a no warehouse costs.



Material requirement planning MRP -I

Material requirement planning is an information system for production planning based on inventory

management. The basic components of material planning are:

Material planning provides information that all the required raw material and products are available forproduction.

Material planning ensures that inventory levels are maintained at its minimum levels. But also ensuresthat material and product are available whenever production is scheduled, therefore, helping in matching

demand and supply.

Material planning provides information of production planning and scheduling but also providesinformation around dispatch and stocking.

Objective of Material Requirement PlanningMaterial requirement planning is processed which production planning and inventory control system, and its

three objectives are as follows:

Primary objective is to ensure that material and components are available for production, and finalproducts are ready for dispatch.

Another primary objective is not only to maintain minimum inventory but also ensure right quantity ofmaterial is available at the right time to produce right quantity of final products.

Another primary objective is to ensure planning of all manufacturing processes, this scheduling ofdifferent job works as to minimize or remove any kind of idle time for machine and workers.

MRP-I isbased on the Master Production Schedule (MPS), a combination of firm orders-on-hand and estimates of future orders, defined by time and required date.

Typically the schedule that results will take into account such aspects as capacity constraintsspares demand, and security stock requirements.

Using the MPS, the MRP program calculates the volume and timing of assemblies, subassembliesand materials required to meet the schedule



Manufacturing resource planning (MRP-II)

Successor to the material requirements planning (MRP-I), it integrates planning of all aspects (not just

production) of a manufacturing firm. MRP-II includes functions such as business planning, production planning

and scheduling, capacity requirement planning, job costing, financial management and forecasting, order

processing, shop floor control, time and attendance, performance measurement, and sales and operations

planning.

SUPPLY CHAIN MANAGEMENT(SCM)

A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply

chain not only includes the manufacturer and suppliers, but also transporters warehouses, retailers, and customers

themselves.

A supply chain is dynamic and involves the constant flow of information, production and funds between different

stages. Each stage of the supply chain performs different processes and interacts with other stages of the supply

chain.

Supply chain management(SCM) is the management of a network of interconnected businesses

involved in the provision of product and service packages required by the end customers in a supply chain.

Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and

finished goods from point of origin to point of consumption.

A typical supply chain may involve a variety of stages such as:

Customers Retailers Wholesalers/distributors Manufacturers Component/raw material suppliers.

Some supply chain has all the stages but some has less according to the businesss environment. Each stage could

be a market or a hierarchy .

The Objective of a Supply Chain

1. In a supply chain, each stage generates some value. And the objective of every supply chain is tomaximize the overall value.

2. Supply chain profitability is the total profit to be shared across all supply chain stages not the singlestages maximum profit.

3. The higher the supply chain profitability, the more successful the supply chain.Supply chain management involves the management of flows between and among stages in a supply chain to

maximize totalprofitability.

Decision Phases in a Supply Chain

These phases are strategy or design phase, planning phase, and operation phase.

1) Supply chain strategy or design.


19/24



In the customer order cycle, there are processes performing customer order cycle.

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle



2) Push/Pull view:Push/Pull view of supply chain is very useful when considering strategic decisions relating

to supply chain design

Pull Process depends on the customer demand. Push processes are the predictions, i.e. manufacturer produces goods and services thinking that there

will be demand or requirement for the product or service produced.

Pull processesdepend on the reactions of the customer. On the other hand push processesare not actual

demand.

For ex.Mobile Mfg. companies assembles parts to produce mobile phone. The process before production of the

phone is Push Processbut the process after production is Pull Process, as the manufacturer is predicting that the

product will be accepted. As the customer orders for mobile phone it will become Pull Process.(Actual demand).

SCM Framework / Activities of SCM/ Issues of \SCM

A framework to understand the various issues involved in SCM is provided by the pyramidstructure for the SCM paradigm .

1) Strategic : On the strategic, level it is important to know how SCM can contribute to theenterprises basic value proposition to the customers? Important questions that are addressed at

this level include :

What are the basic and distinctive service needs of the customers? What can SCM do to meet these needs?

Can the SCM capabilities be used to provide unique services to the customers? etc.2) Structural: After the strategic issues are dealt with, the next level question(s) that should be

asked are :

Should the organization market directly or should it use distributors or other intermediariesto reach the customers?

What should the SCM network look like? What products should be sourced from which manufacturing locations? How many warehouses should the company have and where should the be located? What is the mission of each facility (full stocking, fast moving items only, cross-docking

etc.)? etc.

3) Functional: This is the level where operational details are decided upon. Functional excellencerequires that the optimal operating practices for transportation management, warehouse

operations, and materials management (which includes forecasting, inventory management,

production scheduling, and purchasing) are designed.



SCM Framework Pyramid

4) Implementation: Without successful implementation, the development of SCMstrategies and plans is meaningless. Organizational issues centers on the overall structure,individual roles and responsibilities, and measurement systems needed to build an integrated

operation.

Integrated Supply Chain

Supply chain is responsible for having the right material at the right time. Several departments exist

within the Supply Chain organization that work together closely to ensure the availability of quality

materials in a timely manner, at a reasonable price.

Material Finance and Administration manages the auditing process and provides price/costanalyses and budget coordination.

The Material Requirements Planning Group is responsible for forecasting materials to ensureproduction schedules are met, as well as ensuring inventory levels remain at appropriate levels.

Material Stores manages all shipping, receiving, warehousing, transportation, surplus and scrapdisposal and government property control.

The Material Programs department works directly with Engineering and Manufacturing to makecertain the material acquisition process complies with all company new development programs

and schedules.

Procurement coordinates and negotiates the purchase and delivery of all materials, parts andequipment. This group is also responsible for assuring maximum quality and competitive pricing

to maximize company profits.

Production Control and Logistics coordinates the preparation of production schedules and orderreleases with Engineering and Manufacturing.



Value Chain Analysis

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the

competitive strength of the business.

(1) Primary Activities- those that are directly concerned with creating and delivering a product (e.g.

component assembly)

(2) Support Activities, which whilst they are not directly involved in production, may increase

effectiveness or efficiency (e.g. human resource management).

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are

best provided by others ("out sourced").

Primary Activities

Primary value chain activities include:

Primary Activity Description

Inbound logistics All those activities concerned with receiving and storing externally sourced materials

Operations The manufacture of products and services - the way in which resource inputs (e.g.

materials) are converted to outputs(e.g. products)

Outbound

logistics

All those activities associated with getting finished goods and services to buyers

Marketing and

sales

Essentially an information activity - informing buyers and consumers about products

and services (benefits, use, price etc.)

Service All those activities associated with maintaining product performance after the product

has been sold

Distribution

Finance

warehousing

IT & IS

Logistics

ManufacturingProcurement

Purchasing

Sourcing

Integrated

Supply chain


24/24

Support Activities

Support activities include:

Secondary Activity Description

Finance / Procurement This concerns how resources are acquired for a business (e.g. sourcing

and negotiating with materials suppliers)

Human Resource Management Those activities concerned with recruiting, developing, motivating and

rewarding the workforce of a business

Technology Development Activities concerned with managing information processing and the

development and protection of "knowledge" in a business

Infrastructure Concerned with a wide range of support systems and functions such as

finance, planning, quality control and general senior management

Inbound Logistic

Primary Manufacturing Margin

Activity Outbound logistic

Sales & Distribution

Service

Finance Human Technology Infrastructure

ResourceMargin

Supporting Activity

Value Chain Analysis by Michael Porter

A value chainis a chain of activities that a firm operating in a specific industry performs in order todeliver a valuable product or service for the market.

UNIT III of Industrial Managent

Documents

Transcript of UNIT III of Industrial Managent