MBA, Semester 2 Operations Management Ms. Aarti Mehta Sharma

1. MBA, Semester 2Operations ManagementMs. Aarti Mehta Sharma

3. Inventory Management EOQ, EBQ Types of inventory

4. Stock of any item or resource used in an organisation Inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained Inventory

5. Inventory is working capital How much to keep ? When to store ? When to order ? How large the order should be ? Inventory management

6. Cancel the order Buy from another dealer and resell Postpone order Rearrange deliveries to various customers so that no goodwill is lost TO AVOID THE ABOVE - INVENTORY MANAGEMENT If not being able to fill the order …

7. To maintain independence of operations To meet variation in product demand To allow flexibility in production scheduling To provide a safeguard for variation in raw material delivery time To take advantage of economic purchase order size ( larger shipment – lower price per unit ) Purpose

8. Production Inventories MRO Inventories In Process Inventories Finished Goods Inventories Kinds

9. Items that contribute to or become part of a firms product output Raw materials Finished goods Component parts Supplies Production Inventory

10. Maintenance, repair, and operating supplies which are consumed in the production process but which do not become part of the product (eg. Lubricating oil, soap, machine repair parts) MRO Inventories

11. Semi Finished products found at various stages in the production operation In Process Inventories

12. Completed products ready for shipment Finished goods Inventories

13. Holding costs : costs for storage, handling, insurance, pilferage, breakage, depreciation, taxes Setup : while making different products cost of necessary materials, equipment, paperwork Costs

14. Ordering Costs : managerial and clerical costs to prepare the production orders Shortage costs : when the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. Higher inventory/ higher storage ---- higher costs

15. Independent Demand (Demand for the final end-product or demand not related to other items) Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc) Independent vs. Dependent Demand Finished product E(1) Component parts

17. Independent Demand : Demands for various items are unrelated to each other Dependent Demand : need for any item is a direct result of the demand for some other item For Eg: if output is 400 cars per day, demand ---2000 tyres (min) Demand

18. Single-Period Inventory Model One time purchasing decision (Example: vendor selling t-shirts at a football game) Seeks to balance the costs of inventory overstock and under stock Multi-Period Inventory Models Fixed-Order Quantity Models Event triggered (Example: running out of stock) Fixed-Time Period Models Time triggered (Example: Monthly sales call by sales representative) Inventory Systems

19. Fixed order Quantity System (Q system) Fixed order period system (P system) Two approaches to multi period inventory systems

20. 4. The cycle then repeats. 1. You receive an order quantity Q. Number of units on hand Q Q Q R L L 2. Your start using them up over time. 3. When you reach down to a level of inventory of R, you place your next Q sized order. Time R = Reorder point Q = Economic order quantity L = Lead time Basic Fixed-Order Quantity Model and Reorder Point Behavior

21. A = annual consumption of a material Q = quantity of one order L = Lead time for supply Cc / Ch = cost of carrying an inventory of one unit per year Optimal Order Quantity

22. Cp/Co= cost of procurement ordering per order Total Cost = carrying cost + ordering cost = Cc ×Q/2 + Cp × A/Q

23. EOQ = 2CpA √ Cc Economic Order Quantity

24. Material has a uniform rate of consumption Material is supplied without fail Thus, no variation in supply and demand is assumed Assumptions of EOQ formula

25. A hospital procures its supplies of a material once a year. The total no. procured is 2400 packages in a year. This policy of procuring material once a year is being questioned. The accountants calculate the cost of inventory holding at Rs 36 per pkg per year. It is also figured out that the costs of procurement add upto Rs1200 per order. What inventory policy would you advise to this hospital. Q

26. EOQ = √ 2 × 1200 × 2400 / 36 = 400 units No. of orders = 2400 / 400 = 6 per year

27. An auto industry purchases spark plugs at the rate of Rs.25/- per piece. The annual consumption of spark plug is 18,000 no.’s . If the ordering cost is Rs. 250/- per order and carrying cost is 25 % per p.a, what would be the EOQ ? Q

28. D = 18,000 Cp = 250 Cc = 25% of Rs. 25 EOQ = 2 * 18000 * 250 √ 25 * 0.25 = 1200 units

29. Economic batch quantity (EBQ), also called "optimal batch quantity" or economic production quantity is a measure used to determine the quantity of units that can be produced at minimum average costs in a given batch or production run.

30. Batch Size is large – average level of inventory is also large – inventory carrying charges are high – inventory ordering charges low – set up charges low Cost of set up Cost of time spent in setting up the equipments Cost due to rejects, scrap Cost of administrative paper work Economic Mfg Batch Size

31. t=time interval of production d=rate of consumption = d p=no. of units produced Peak inventory during any cycle = t ×(p-r) If Q is the mfg batch quantity, no. of set ups during a year = A / Q

32. Economic Batch Quantity for a single product = √ 2 Cp A / Cc ( p-d) p

33. 2CpA Cc1 - Qopt = = = 2,256.8 yards d p Q p 2,256.8 150 32.2 150 2(150)(10,000) 0.75 1 - Production run = = = 15.05 days per order Q Cc = $0.75 per yard Co = $150 D = 10,000 yards d = 10,000/311 = 32.2 yards per day p = 150 yards per day

34. A production manager of a plant must determine the lot size for a particular component that has a steady demand of 50 units per day. The production rate is 200 units per day, annual demand is 10,000 units, set up costs is Rs. 200, annual holding costs is Rs. 0.20 per unit and the plant operates 350 days per year. Calculate EBQ Q

35. 2 Cp A / Cc ( p-d) √ p = 2 * 200 * 10000 0.20 * (200-50) √ 200 = 5160 units

36. Items of inventory are classified into A, B, C or other classes for selective management control Depending upon - necessity of control - relative importance of material - particular characteristic of matl Classification of Materials

37. Class A 5 – 15 % of units 70 – 80 % of value Class B 30 % of units 15 % of value Class C 50 – 60 % of units 5 – 10 % of value ABC Classification

38. Based upon relative importance of the materials Basis : price / criticality / non availability / weight Annual consumption value of the items ABC Analysis

39. A B C

40. Q

41. In reality, the demand is not uniform, it follows some prob distn. We minimise the expected costs rather than the actual costs. Probabilistic Inventory Models

42. The demand for a newspaper does not follow a fixed pattern. The associated prob distn may be discrete or continuous. For each unsold newspaper there will be a penaltymarginal cost of surplus/unit C1 = purchase price/unit – salvagevalue/unit For each shortage unit, there will be a penalty which is given by the formula marginal cost of shortage/unit C2 = selling price/unit – purchase price/unit Eg :

43. Let the generalised probability distribution of the demand of the item be a discrete distribution as shown below :

44. The optimal order size Di0 is determined by the relation Pi-1 < C2 < Pi C1 + C2

45. Example The daily demand of bread at a bakery follows a discrete distribution as follows :

46. The purchase price of the bread is Rs. 8 per packet. The SP is rs.11 per packet.If the bread packets are not sold within the day of purchase, they are sold at Rs. 4 per packet to secondary hotels. Find the optimal order size of the bread.

47. Given purchase price / packet = Rs. 8 SP / packet = Rs. 11 Salavge price/ packet = rs. 4 Marginal cost of surplus/unit C1 = 8-4 = Rs. 4 Marginal cost of shortages C2 = 11 -8 = rs. 3 Cumulative prob. P = c2 / c1 + c2 = 3/4+3 = 0.43

48. Cumulative prob of demand

49. P3< C2 = 0.43 < P4 C1 + C2 0.41 < 0.43 < 0.50 THEREFORE, THE OPTIMAL SIZE is D4 which is equal to 28 breads

50. Variable sales Delay in supplies of raw material Buffer stock – extra stock Consideration of Uncertainities