Unit 2

1. Unit 2 Material & Inventory Management

2. Overview of the Unit • Material Management • Handling Technology

3. Unit Overview • Robots, Automated storage and retrieval systems (ASRS) • JIT, / Kanban, ABC Systems

4. Unit Overview • Independent Demand Inventory Models • Fixed order system • Economic Order Quantity

5. Material Management • Ref to all tasks related to flow of materials From the purchase of raw material to the distribution of finished products or services. • It is concerned with decisions about purchasing materials & services, inventories, production levels, staffing pattern, schedules & distribution.

6. Modern Materials Management • Integration of activities done by 3 different departments namely, Purchasing, Production Control & distribution.

7. Inventory • Includes materials that are Raw, in-process, finished, packaging, spares & in stock, maintained by the organization in order to meet day-to-day and future demand.

8. Types of Inventory Production Inventories MRO Inventories In-process Inventories Finished goods Inventories Goods ready for shipment Raw Mat Parts & Components Lube oil Machine parts Semi Finished goods

9. Inventory Management • Is the development & administration of policies, systems & procedures which will minimize total costs related to inventory decisions.

10. Primary Objectives - Purchasing - Stores & Inventory Mgmt - Continuity of supply - Quality of Materials - Good supplier relation Secondary Objectives - Make or buy - Value analysis & engineering - Standardization - Product devlpmnt & new products - Forecasting - Orgn structure - Leadership question - Structural balance Objectives of Materials Mgmnt

11. Secondary Objectives • Value Analysis & Value Engineering Done by in-house engineers and purchase team. Qlty & design of the product ordered.

12. Organization Structure • Determination of basic objectives • Determination of areas of activity • Determination of ideal structure • Authority & responsibility • Span of control • Personal Ability

13. Organization Structure • Unity of command • Job Assignment • Regulations • Two way communication • Flexibility • Line & staff activity

14. Material Handling • Defined as an art & science of moving, packaging & storing of materials.

15. Importance of Material Handling • Efficient material handling results in lower costs. • Enables higher productivity.

16. Objectives of Material Handling • Increased productivity • Lower Costs • Control of flow of Materials • Reduction in Manufacturing Cycle time • Increased Qualityby reducing damages.

17. Principles of Material Handling • Direct flow pattern • Planned layout • Mechanized Material Handling • Movement of shortest distance

18. Principles of Material Handling • Reduction in repetitive handling • Flexible System • Carry Full load

19. JUST IN TIME – JIT • Intro abt JIT. • JIT in Maruthi. • JIT 2 or modern JIT.

20. KANBAN • Only means of communication. • Spl cards used for communication which are called KANBAN cards.

21. ABC Analysis • Inventory control technique where materials are classified as A, B & C category based on their annual consumption value.

22. ABC Analysis • A category items – Top 10% • B Category Items – Next 20% • C Category Items – Rest 70% • Classification done in order to exercise different types of control over materials.

23. Related Techniques • SDE Analysis – Scarce, Difficult & Easy • SOS Analysis – Seasonal & Off seasonal • XYZ Analysis – same as ABC.

24. ABC Control

25. ABC Control

26. ABC Analysis – Quantitative Refer word document.

27. Decoupling inventory • Inventory “decouples” in different stages. It might be raw material, WIP, finished goods inventory. Ex: customer has inventory for 10 days for the consumption. For 10 days the customer is decoupled from the producer. • So, decoupling inventory is the one which decouples the customer and the producer.

28. Safety Stock • Raw material, WIP or finished goods which are extra stock required to take care of fluctuation or uncertainties in the demand or lead time.

29. Lead Time • Time taken to receive the delivery after placing order with the supplier. It is the number of days required to receive the inventory from the date of placing order. It is also called Procurement time of Inventory.

30. Lead Time Supply lead time: • This time refers to the time lapse between placing of order with the supplier and receiving it by the customer. Manufacturing Lead time: • The average time consumed by the product in the plant.

31. Supply lead time Supply lead time (L) • L=T1+T2+T3+T4+T5 • T1= order genesis time and transit time (selection of supplier). • T2= manufacturing time of the product by suppliers.

32. Supply lead time • T2= 0 If the product is readily available with the supplier. • T3= inspection time. • T4= transit time. • T5=receiving time. • If L is high, more inventory is needed to take care of high lead time.

33. Inventory cost • Ordering Cost A. Cost of placing an order with Vendor: Preparing a purchase order Processing Payments Receiving & Inspecting Materials

34. Inventory Cost • Ordering Cost contd… B. Ordering from the Plant: Machine set up cost Start – up to scrap generated from getting a production run started.

35. Inventory Cost • Carrying Cost • Costs Connected Directly with Materials Obsolescence Deterioration Pilferages.

36. Inventory Costs • Carrying Cost contd… B. Financial Costs Taxes Insurance Storage Interest

37. Inventory Costs • Carrying Cost contd… (Broader View) • Capital Cost (Interest on Investment) • Storage Space Cost (Rent, Tax, Insu,Depri) • Inventory Service Cost (Emp cost, Taxes) • Handling Equipment Cost (Tax, Insu, Depri,etc) • Inventory Risk Cost (Obso, Insu, Pilf, etc)

38. Inventory Costs • Out-of-Stock Cost • Back Ordering • Lost Sales

39. Inventory Costs • Capacity Costs • Overtime payments when capacity is small • Lay-offs & Idle time when capacity is too large.

40. Fixed Order Quantity Also Known as Q Sys & Perceptual review sys. Fixed Qnty of Mat ordered whenever stock reaches reorder point. Fixed Qnty = EOQ Fixed Order Period Also known as P Sys Mat ordered based on the fixed predetermined period. Helps in huge discounts. Independent Demand Inventory ModelsFixed Order System

41. Distinction – Q & P Sys

42. Economic Order Quantity • EOQ refers to the level of Inventory order of which the inventory cost comprising ordering cost & carrying cost is minimum. • Also known as Q Opt (Optimum Quantity)

43. EOQ Contd… • Graphical Representation:

44. EOQ Contd… • Formula: EOQ = Q = 2DCo/PCi Where, D = Demand or Annual Demand Co = Ordering Cost per Order, Ci = Inventory Carrying Cost as a percentage of value of the item per unit per year. P = Unit price of the item.

45. EOQ Sums Q 1. A company’s books of A/Cs revealed the following: Staff salary of purchase dept – Rs. 250000/- Warehouse personnel salaries - Rs. 275000/- Warehouse security - Rs. 80000/- Traveling & Purch follow up – Rs. 80000/- Taxes & Insu – 1% p.a. Interest on Inventory - 20% Bills payments – Rs. 30000/-. Obs & Pilf Rs.20000 Mat handling Rs.1.5 lakhs, Inward Inspec Rs.48000

46. EOQ Sums contd… • It is also known that average inventory is Rs.60 lakhs, No of orders placed is 3400 orders p.a.. 1. Calculate: • Ordering Cost per order. 2. Inventory carrying cost as %. • EOQ if annual demand is 12000 units & Unit price is Rs.60/-.

47. EOQ Sums contd… • Soln: Ordering Cost per order = Tot ordering cost / no. of orders per year Inventory carrying cost in % = (Tot inventory cost/ Avg inventory p.a)*100

48. EOQ Sums contd… EOQ = Q = 2DCo/PCi Step 1: From the given data classify the details as Ordering Cost items & Inventory Carrying Cost Items.

49. EOQ Sums contd… Step 2: Ordering Cost items: Sal of Purch dept staff - 250000 Traveling & purch followup – 80000 Cost of bills of payments – 30000 Cost of inward inspection – 48000 Total Ordering Cost – 408000/-

50. EOQ Sums contd… Step 3: Inventory Carrying Cost items: Warehouse personnel Sal – 275000 Warehouse Security - 80000 Taxes & Insu – 1/100*60,00,000 = 60000 Interest on inventory – 20% = 1200000 Mat handling cost – 150000 Obse & Pilf – 20000 Total Inventory carrying cost = 1785000.