Aggregate Planning Tactics & Fundamentals of Inventory Control

1. Aggregate Planning Tactics
&
Fundamentals of Inventory Control
Module 3

3. Aggregate Planning Tactics
• Introduction
• Need of aggregate planning
• Role of aggregate planning
• Involvement of various functions in formulating
aggregate plan
• MRP & MRP II- general concepts, objectives,
advantages
• Bill of material (BOM)
• ERP (scope , advantages &industrial applications)

4. Fundamentals of Inventory Control
• Purpose of inventories,
• Basic requisites for management of inventory
• Types of inventory costs,
 EOQ
 Safety Stock
 ABC Classification
 JIT(Concept understanding)
Materials handling equipment

5. • Aggregate planning involves planning the best quantity
to produce in the intermediate-range horizon (3 months
to one year)
• Aggregate production planning is the process of
determining output levels of product groups over the
next 6 to 18 months period.
• Determine the resource capacity needed to meet
demand over an intermediate time horizon
– Aggregate refers to product lines or families
– Aggregate planning matches supply and demand
Aggregate planning

7. Objectives of Aggregate Planning
• Minimize cost / maximize profits
• Maximize customer service
• Minimize inventory investment
• Minimize changes in production
• rates
• Minimize changes in workforce levels
• Maximize utilization of plant and Equipment
• To establish company-wide strategic plan for allocating resources
• To develop an economic strategy to meet customer demand.

8. Inputs to and Outputs from Aggregate Production Planning

9. Aggregate planning inputs
• Resources
- Workforce
- Facilities
• Demand forecast
• Policies
- Overtime
- Subcontracting
• Cost
- Inventory cost
- Hiring/Firing
- Overtime

10. The various inputs to aggregate plans that
affect the performance of production and
operations managers are:
i. Engineering – New products, product design
ii. Materials – Supplier capacity, storage capacity,
availability
iii.Operations – Current machine capacities, workforce
capacity
iv. Marketing and distribution: Customer needs, demand
forecast
v. Human resources: labor market conditions, training
capacity

11. Need for Aggregate Capacity Planning
1. It facilitates fully loaded facilities and minimizes overloading
and under loading and keeps production costs low.
2. Adequate production capacity is provided to meet expected
aggregate demand.
3. Orderly and systematic transition of production capacity to
meet the peaks and valleys of expected customer demand is
facilitated.
4. In times of scarce production resources, getting the maximum
output for the amount of resources is enhanced
5. To manage the change in production/ OM by planning for
production resources that adapt to the changes in customer
demand

12. Aggregate Planning Process

13.  Steps in Aggregate Capacity Planning
i. Determine the demand (i.e., sales forecast) for each product
for each time period (i.e., weeks or months or quarters) over
the planning horizon (6 to 12 months).
ii. Determine the aggregate demand by summing up the demand
for individual products.
iii.Transform the aggregate demand for each time period into
workers, materials, machines required to satisfy aggregate
demand.
iv. Identify company policies that are pertinent (e.g., policy
regarding safety stock maintenance, maintaining stable
workforce etc.).
v. Determine unit costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs etc.
vi. Develop alternative resource plans for providing necessary
production capacity to support the cumulative aggregate
demand and compute the cost of each alternative plan.
vii.Select the resource plan from among the alternatives
considered that satisfies aggregate demand and best meets the
objectives of the firm.

15. Role of Aggregate Planning
• Integral to part of the business planning
process
• Supports the strategic plan
• Also known as the production plan
• Identifies resources required for operations
for the next 6-18 months
• Details the aggregate production rate and size
of work force required

16. Role of Aggregate Planning
• Specify operational parameters over the time
horizon
– Production rate
– Workforce
– Backlog
– Overtime
– Inventory on hand
– Machine capacity level

17. Eight costs generally considered in
aggregate planning
• Regular time production cost,
• Overtime production cost,
• inventory cost,
• shortage or backorder cost,
• cost of hiring,
• cost of layoff,
• outsourcing cost and
• underutilization cost.

20. Master Production Scheduling
A master production schedule (MPS) is a plan for individual
commodities to be produced in each time period such
as production, staffing, inventory, etc. It is usually linked
to manufacturing where the plan indicates when and how
much of each product will be demanded.
Objectives of Master Production Scheduling
1. To schedule end items to be completed promptly and
when promised to customers.
2. To avoid overloading or under loading the production
facility so that production capacity is efficiently utilized
and low production costs result.

21. Master Production Scheduling
• Disaggregate of an aggregate planning
Disaggregate done on based on
1. Product Family
2. Labor force
3. Time

22. Purpose of MPS
• To specify production quantity
• Specify the quantity of each type – Service

23. Functions of MPS
• Translating aggregate plans
• Evaluating alternative master schedules
• Generating material and capacity requirements
• Facilitating information processing
• Maintaining priorities
• Utilizing the capacity effectively.

24. Resource Requirement Planning
MRP I & MRP II
Material Requirements Planning
Manufacturing Requirements
Planning

25. WHAT IS MATERIAL REQUIREMENTS
PLANNING (MRP)?
• It is a production planning process that starts from the demand
for finished products and plans the production step by step of
subassemblies and parts.
• Materials Requirements Planning (MRP) is a set of techniques
that takes output from the Master Production Schedule and
combines with the information from inventory records to
determine the requirements and schedule of timing for each
item.
• Objective: To get the right material to the right place at right
time

26. Material requirements planning (MRP) is a production
planning, scheduling, and inventory control system used to
manage manufacturing processes. Most MRP systems
are software-based, but it is possible to conduct MRP by hand
as well.
An MRP system is intended to simultaneously meet three
objectives:
• Ensure materials are available
for production and products are available for delivery to
customers.
• Maintain the lowest possible material and product levels in
store
• Plan manufacturing activities, delivery schedules
and purchasing activities.

27. Inputs to MRP
• MPS (About end products ie 100 cars in week 3)
• BOM (What do I need to make the above, it tell me the
components of the product to be produced) ie 1 car
needs 5 tires, steering
• (A bill of materials or product structure sometimes bill
of material, BOM or associated list is a list of the
raw materials, sub-assemblies, intermediate
assemblies, sub-components, parts and the quantities
of each needed to manufacture an end product.)
• Inventory status file : Data on how much material do
we have

28. Outputs of MRP
• Timings and quantities of subassembly
• Parts
• Raw materials

29. WHERE IS MRP APPLICABLE?
• MRP is applicable for industries that offer a
variety of finished products where the customer
is allowed to choose among many different
options.
• MRP is most appropriate when the
manufacturing environment is complex and
uncertain.

30. Purpose of MRP
Control inventory levels
Assign operating priorities
Plan capacity to load the production system

31. MRP INPUTS
• Master Production Schedule (MPS)
• Bills of materials (BOM)
• Inventory status file
• Lead time

32. MRP OUTPUTS
• Primary reports
1. Work orders
2. Purchase orders
3. Action notices or rescheduling notices
• Secondary reports
1. Exception reports
2. Planning reports
3. Performance Control reports
• Inventory transaction

33. MRP INPUT - BILLS OF MATERIALS
(BOM)
• A listing of all of the raw materials, parts, subassemblies,
and assemblies needed to produce one unit of a product .
• BOM Shows the way a finished product or parent item is
put together from individual components.
• Production planners explode BOM to determine the
number, due dates, and order dates of subcomponents.
58*100= 500 tires

34. MRP INPUT - MASTER PRODUCTION
SCHEDULE (MPS)
• Based on actual customer orders and predicted
demand.
• Indicates when each ordered item will be produced in
coming weeks, and in how much quantity.
• It is a plan specifying timing and quantity of production
for each end item.
• MPS inputs come from sales and marketing .
• MPS covers about 1-3 months into the future.

35. MRP INPUT - INVENTORY STATUS
FILE
• Detailed information regarding the quantity of each item,
available in hand, on order to be released, for use in various
time periods.
• MRP system using inventory master file is used to
determine the quantity of material available for use in a
given period.
• If sufficient items not available , the system includes the
item on the planned order release report .
• Also known as Inventory Master File

36. MRP OUTPUTS – PRIMARY
REPORTS
• Primary reports
1. Work orders / Planned orders - schedule indicating
the amount and timing of future orders.
2. Order Release - Authorization for the execution of
planned orders.
3. Action Notices or Rescheduling Notices - which
orders are to be released, revised and canceled during
the current time period.

37. MRP OUTPUTS- SECONDARY REPORTS
• Secondary Reports
1. Performance control Reports – evaluate system operations .
They aid in measuring deviations from plans, and also provide
information to assess cost performance.
2. Planning Reports – are useful to forecast future inventory
requirements.
3. Exception Reports – these help to find the major discrepancies
such as late and overdue orders, excessive scrap rates, reporting
errors, etc.

38. MRP PROCESS
• Exploding and Offsetting
• Gross and Net Requirements
• Releasing Orders
• Low level Coding and Netting

39. EXPLODING AND OFFSETTING
• Lead time – it is the time needed to perform the process . It includes
order preparation, queuing, processing moving receiving and
inspecting time as well as any expected delays.
• Exploding the requirements – it is the process of multiplying the
requirements by usage quantity of each item and recording the
appropriate requirements throughout the product tree.
• Offsetting – it is a process of placing the exploded requirements in
their proper periods based on lead time.

40. GROSS AND NET REQUIREMENTS
• Gross Requirement - Total expected demand of the product.
• Net Requirements - Actual amount needed in each time period.
Net Requirements = Gross Requirement – available inventory
• Planned on hand - Expected inventory on hand at the beginning of
each time period.
• Planned-order receipts - Quantity expected to received at the
beginning of the period
• Planned-order releases - Planned amount to order in each time
period

41. RELEASING ORDERS
• Releasing an order – means authorization is
given to buy the necessary material or to
manufacturing of required component.

42. NETTING
• Netting – is a process in which any stock on
hand is subtracted from the gross requirement
determined through explosion, giving the
quantity of each item needed to manufacture
the required finished products.

43. BENEFITS OF MRP
• Keep inventory levels to a cost-effective minimum.
• Keeps track of inventory that is used.
• Tracks the amount of material that is required .
• Determine the best lot sizes to fulfill orders.
• Set up production times among the separate
manufacturing stages.
• Plan for future needs of raw

44. EVOLUTION OF MRP INTO MRP
II

45. MRP II DEFINED…
Manufacturing resource planning (MRPII) is defined as a
method for the effective planning of all resources of a
manufacturing company. Ideally, it addresses operational
planning in units and financial planning .
This is not exclusively a software function, but a
combination of people skills, dedication to data base
accuracy, and computer resources. It is a total company
management concept for using human resources which is
used more productively.

46. • MRP II is a computer-based system that can
create detail production schedules using real-
time data to coordinate the arrival of
component materials with machine and labor
availability

47. ERP
MRP -ΙΙ
MRP

48. MRP-II
• A method for the effective planning of all resources of
manufacturing-
– Financial accounting incorporated
– Sales
– Operations Planning
– Simulate capacity requirements of different possible
Master Production Schedules.

49. Features of MRP- II
• Fluctuation of forecast is taken into account by including
simulation of MPS.
• MRP - II is a total company management concept for using
more human resources effectively.
• The MRP - II is carried out by a synergistic combination of
computer and human resources.
• The integration extends from strategic to operational level
and encompasses long term planning up to short term
control.

50. • Increased direct labor productivity
• High accuracy of inventory and manufacturing capacity
• Effective interaction between different functions due to
common databases and improved information flow
• Quicker implementation of engineering changes
• Simulation capability to test what-if scenarios in a risk
free environment
• Company focus shifts from crisis management to
process control
50
Benefits Of MRP-II

51. • For Manufacturing Functions:
• Better control of inventories
• Improved scheduling
• Productive relationships with suppliers
• For Financial and Costing Functions :
• Reduced working capital for inventory
• Improved cash flow through quicker deliveries
• Accurate inventory records
• Timely and valid cost and profitability information
• For Design / Engineering Functions :
• Improved design control
• Better quality and quality control
51
Benefits Of MRP - II

52. Enterprise Resource Planning -
ERP
52

53. What is ERP?
ENTERPRISE RESOURCE PLANNING(ERP) is a cross-
functional enterprise system driven by an integrated suite
of software modules that supports the basic internal
business processes of a company
53

54. • The practice of consolidating an enterprise’s planning,
manufacturing, sales and marketing efforts into one
management system.
• Combines all databases across departments into a
single database that can be accessed by all
employees.
• ERP automates the tasks involved in performing a
business process.
54
What is ERP?

55. Before ERP example
55
Vendor
Sales dept.
Demographic Files
Warehouse
Inventory Files
Purchasing dept.
Purchasing Files
Accounting dept.
Accounting Files
Check
for
parts
Call
back
“not
in
stock”
We
ordered
parts
“we
need
parts”
“we
ordered
parts”
Place order
Sends report
Ship parts.
Sends report
Call
back
“not
in
stock”
We
ordered
parts

56. Typical Business Process :
Key observation
56
 A typical enterprise has many Departments/ Business units(BU).
 These Departments/ BU continuously communicate and
exchange data with each other.
 The success of any organization lie’s in effective
communication and data exchange within the Departments/
BU as well as associated third party such as Vendors, Outsourcers
and Costumers.
 Also known as Decentralized System.

57. Problems with Decentralized System
57
 Numerous disparate information system are developed
individually over the time.
 Integrating the data becomes time and money consuming.
 Inconsistences and duplication of data.
 High inventory, material and human resource cost.

58. 58
Vendor
Sales Dept. Accounting
Purchasing Dept.
Warehouse
Database
Ship parts
Invoice Accounting
Centralized System :
ERP example

59. Centralized System :
Key observation
59
 Data is maintained at a central location and is shared
with various Departments.
 Departments have access information/ data of the other
Departments/ BU/

60. Benefits of Centralized
System
60
 Eliminates the duplication, discontinuity and redundancy in data.
 Provides information across departments in real time.
 Provides control over various business processes.
 Increase Productivity, better inventory management, promotes quality,
reduced material cost, boosts profits.
 Better Customers interaction, increased throughput, improves
customer services.

61. Functional
Modules
Project
Human
Resource
Finance
Market
Sales
Inventary
control
Purchase
Production
planning

62. ERP Evolution
62
 Inventory Management & Control-1960’s
Inventory Management and control is the
combination of information technology and
business processes of maintaining the
appropriate level of stock in a warehouse. The
activities of inventory management include
identifying inventory requirements, setting
targets, providing replenishment techniques and
options, monitoring item usages, reconciling the
inventory balances, and reporting inventory
status.

63. ERP Evolution
63
 Material Requirement Planning (MRP)-1970’s
Materials Requirement Planning (MRP) utilizes software
applications for scheduling production processes. MRP
generates schedules for the operations and raw material
purchases based on the production requirements of
finished goods, the structure of the production system,
the current inventories levels and the lot sizing procedure
for each operation
 Manufacturing Requirements Planning (MRP II)-1980’s
Manufacturing Requirements Planning or MRP utilizes
software applications for coordinating manufacturing
processes, from product planning, parts purchasing,
inventory control to product distribution.

64. ERP Evolution
64
 Enterprise Resource Planning (ERP)-1990’s
Enterprise Resource Planning or ERP uses multi-
module application software for improving the
performance of the internal business processes.
ERP systems often integrates business activities
across functional departments, from product
planning, parts purchasing, inventory control,
product distribution, fulfillment, to order
tracking. ERP software systems may include
application modules for supporting marketing,
finance, accounting and human resources.

65. Benefits of ERP Systems
 Improving integration, flexibility
 Fewer errors
 Improved speed and efficiency
 More complete access to information
 Lower total costs in the complete supply chain
 Shorten throughput times
 Sustained involvement and commitment of the top management
 Reduce stock to a minimum
 Enlarge product assortment
 Improve product quality
 Provide more reliable delivery dates and higher service to the
customer
 Efficiently coordinate global demand, supply and production
65

66. Industrial applications of ERP
Retail
• The face of retail is sales and payment. Behind the scenes,
inventory management and tracking, shipping, and
marketing create the backbone. Clothes, cars, and food all
follow the same basic principles and require very similar
functionality.
• By utilizing an order management system, orders can be
coordinated across multiple stores while advanced pricing
allows for management of sales and numbers that can be
sorted through various hierarchies. Orders can also be
tracked based on stock and non-stock items, recurring
orders, and real-time updates to inventory.

67. Industrial applications….
Manufacturing
• Providing goods to the retail scene are the manufacturers. Of
many types and sizes, all work very similarly in their need to
maintain competitiveness through integration of all facilities.
• Once integrated, ERP software can be used to track the financial
portion through product costing and manufacturing accounting
(essential for tracking work orders and shop floor transactions).
• It also can be used the track the shop floor through work order
processing and managing project data. With all of this
information connected and organized across multiple facilities,
ERP software increases productivity by decreasing information
errors.

68. Real estate management
• ERP solutions for Real Estate Management efficiently streamlines
construction and management of industrial and commercial real
estate. Not only is real estate management important for the
construction of properties, but as well as the building management
proceeding its construction.
• Serving as a landlord may seem like an ideal job to external viewers,
but the stresses they incur having to keep up with their various
tenants’ problems is immense.
• Not only do they have to track rent payments, they also attend to
any calls about disturbances or maintenance issues.
• To ease the pressure to organize such a vast amount of information,
real estate management in ERP software is lease-based and creates
recurring bills (i.e. rent), rent projections for coming years, and
processes revenue.
Industrial applications….

69. Bill of Materials (BOM)
A bill of materials or product structure (sometimes bill
of material, BOM orassociated list) is a list of the raw
materials, sub-assemblies, intermediate assemblies,
sub-components, parts and the quantities of each
needed to manufacture an end product.

72. Fundamentals of Inventory Control
The term ‘inventory’ refers to the stock pile of
the product which a firm is offering for sale
and the components that are essential for the
product.
There are three types of inventories
(1) Raw materials
(2) Work in Process (Semi-finished goods) and
(3) Finished goods

73. Types of Inventory
Work in
process
Work in
process
Work in
process
Finished
goods
Raw
Materials
Vendors Customer

74. 5/22/2023 74
Nature of Inventories
• Raw Materials – Basic inputs that are converted
into finished product through the manufacturing
process
• Work-in-progress – Semi-manufactured products
need some more works before they become
finished goods for sale
• Finished Goods – Completely manufactured
products ready for sale
• Supplies – Office and plant cleaning materials not
directly enter production but are necessary for
production process and do not involve significant
investment.

75. Motives for Holding Inventory
Transaction Motive: A firm is required to maintain inventory on regular
basis in order to facilitate the smooth and uninterrupted production
and sales operations. Due to the time lag present between the
placement of order and its receipt, an optimum amount of inventory is
always required to be maintained by the organization.
Motive: Apart from holding stock for regular transactions, an organization
is required to hold the inventory to meet the sudden changes in
demand and supply forces like delay in supply of material due to strike,
transport, short supply etc. Similarly, demand for finished goods of
seasonal nature may increase suddenly. Therefore, company is required
to maintain a sufficient supply in the form of inventory.
Speculative Motive: The Company may like to purchase and stock the
inventory in the quantity which is more 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.

76. Inventory Management
Inventory management is the practice overseeing and
controlling of the ordering, storage and use of
components that a company uses in the production of
the items it sells. Inventory management is also the
practice of overseeing and controlling of quantities of
finished products for sale.
Inventory management is a very important function that
determines the health of the supply chain as well as
the impacts the financial health of the balance sheet.
Every organization constantly strives to maintain
optimum inventory to be able to meet its requirements
and avoid over or under inventory that can impact the
financial figures.

77. Objectives of Inventory Management
• To ensure the availability of supply of raw material, stores and
spares, Work-in process, and finished goods to maintain
production levels and meet various requirements of the
customers.
• To minimize loss due to deterioration, obsolescence, pilferage,
theft etc.
• To maintain investment in inventory at optimum level striking a
balance between cost of holding inventory and stock out costs.
• To ensure effective and full utilization of storage capacity and
other facilities related to inventory holding.
• To have effective control over in inventory purchase, uses,
storage etc.
• To provide basis for short term and long term plan.
• To improve the customer service needs adequately.

78. 5/22/2023 78
An effective inventory management should
• Ensure a continuous supply of raw materials to
facilitate uninterrupted production
• Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price changes
• Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service
• Minimize the carrying cost and time
• Control investment in inventories and keep it at an
optimum level

79. Inventory Costs
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost & Cost of
Replenishment
a. Cost of Loss, pilferage, shrinkage and
obsolescence etc.
b. Cost of Logistics
c. Sales Discounts, Volume discounts and other
related costs.

80. 1. Ordering Cost
• Cost of procurement and inbound logistics costs form a part of Ordering
Cost. Ordering 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. Where as
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.
• The economic order quantity is the optimum quantity of goods to
be purchased at one time in order to minimize the annual total
costs of ordering and carrying or holding items in inventory.

81. Carrying Cost
Inventory storage and maintenance involves various types of
costs namely:
• Inventory Storage Cost
• Cost of Capital
Inventory carrying involves Inventory storage and
management either using in house facilities or external
warehouses owned and managed by third party vendors. In
both cases, inventory management and process involves
extensive use of Building, Material Handling Equipments, IT
Software applications and Hardware Equipments coupled
managed by Operations and Management Staff resources.

82. 5/22/2023 82
An optimum inventory level involves three types of costs
Ordering costs:-
• Order placing
• Transportation
• Receiving, inspecting and storing
• Quality control
• Clerical and staff
Stock-out cost
• Loss of sale
• Failure to meet delivery
commitments
Carrying costs:-
• Warehousing or storage
• Handling
• Clerical and staff
• Insurance
• Interest
• Deterioration, shrinkage,
evaporation and obsolescence
• Taxes
• Cost of capital

83. Economic Order Quantity (EOQ)
• The quantity of inventory to be ordered and the timing of order
are the underlying issues that need to be resolved to arrive at the
optimal level of inventory.
• Therefore, it involves a tradeoff between profitability and liquidity.
The two questions that the inventory theory related are-
(a) How much should be ordered?
(b) When should be ordered?
• First question, how much, arises due to the presence of ordering
costs and other issues which depend on the frequency of order.
The smaller the order size, more orders will be placed and
consequently the more the ordering costs.
• The second question confronts with the when to order, arises due
to supply side uncertainties.

84. What is EOQ?
• Economic order Quantity (EOQ) is the order size for
some particular inventory item that results in lowest
total inventory cost for the period. It refers to the lot
size of inventory that is most economical to procure
and hold.
• Total inventory cost consists of inventory ordering
cost and inventory carrying cost. An EOQ may be
computed for each inventory item. EOQ assumes
that the relevant costs of inventory can be divided
into order cost and carrying costs.(The model
excludes the actual cost of the inventory) Each of
them has certain key components and
characteristics.

86. • EOQ = √(2SD / H), or the square root of (2 x S x
D / H).
S = Setup costs (per order, generally includes
shipping and handling)
D = Demand rate (quantity sold per year)
H = Holding costs (per year, per unit)

87. Relationship between the carrying
Cost and EOQ :
Total carrying cost increases as inventory
increase. It has a positive correlation with the
level of inventory.

88. Assumptions of EOQ
The model rests on the following assumptions:
a. There is a known constant demand
b. Ordering costs are known and remain constant.
c. Carrying costs are known and remain constant
d. Production and inventory capacity is unlimited.

89. 5/22/2023 89
EOQ – Three Approaches
• Trial and Error method
• Order-formula approach
• Graphical approach

90. 5/22/2023 90
Trial & Error Method
Assumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5
Order size Q 1200 600 400 300 240 200 150 120 100
Average inventory Q/2 600 300 200 150 120 100 75 60 50
No. of orders C/Q 1 2 3 4 5 6 8 10 12
Annual carrying cost
I* Q/2
600 300 200 150 120 100 75 60 50
Annual ordering cost
O*C/Q
37.5 75 112.5 150 187.5 225 300 375 450
Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500

91. 5/22/2023 91
Order- Formula approach
1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units

92. Q
0 T1 T2 T3 T4
Average inventory = Q/2
Time
Inventory
level
order
quantity
Certainty case of the inventory cycle
1. Here the negative slope from Q to T1 represents the
inventory being used up
2. T1, T2, T3, T4 represents the replenishment points
3. The inventory varies between 0 and Q

93. Graphical method to find EOQ
Cost
in
RS.
Order quantity
EOQ
0

94. Safety Stock
• Safety stock (also called buffer stock) is a term
used by logisticians to describe a level of extra
stock that is maintained to mitigate risk
of stockouts due to uncertainties in supply and
demand
• Safety stock is an additional quantity of an item
held in the inventory in order to reduce the risk
that the item will be out of stock, safety stock act
as a buffer stock in case the sales are greater than
planned and or the supplier is unable to deliver
the additional units at the expected time.

95. • The less accurate the forecast, the more safety
stock is required to ensure a given level of
service.
• A common strategy is to try and reduce the
level of safety stock to help keep inventory
costs low once the product demand becomes
more predictable.
• This can be extremely important for companies
with a smaller financial cushion or those trying
to run on lean manufacturing, which is aimed
towards eliminating waste throughout the
production process.

96. Reasons for keeping safety stock
• Safety stocks are mainly used in a “Make To
Stock” manufacturing strategy.
• This strategy is employed when the lead time of
manufacturing is too long to satisfy the customer
demand at the right cost/quality/waiting time.
• The main goal of safety stocks is to absorb the
variability of the customer demand.
• Creating a safety stock will also prevent stock-
outs from other variations, like an
upward trend in customer demand.

97. • Safety stock is used as a buffer to protect
organization from stockouts caused by
inaccurate planning or poor schedule
adherence by suppliers
• Various methods exist to reduce safety stock,
these include better use of technology,
increased collaboration with suppliers, and
more accurate forecasting
• An Enterprise Resource Planning system (ERP
system) can also help an organization reduce
its level of safety stock. Most ERP systems
provide a type of Production Planning module

98. ABC Classification
• In case of large firms inventories maintained are
not uniform in terms of value and number.
Therefore, it is not desirable to keep the same
level of control on all the items of inventory.
• For the purpose of effective control mechanism,
firm needs to classify inventory based upon the
investment required and efforts to be made in
controlling them.
• ABC Analysis measures the proportion of each
item of inventory in the total inventory in terms of
its value.

99. ABC Classification
• This technique divides inventory into three
categories A, B & C based on their annual
consumption value.
• It is also known as Selective Inventory Control
Method (SIM)
• This method is a means of categorizing inventory
items according to the potential amount to be
controlled.
• ABC analysis has universal application for fields
requiring selective control.

100. Procedure for ABC Classification
• Make the list of all items of inventory.
• Determine the annual volume of usage & money value of
each item.
• Multiply each item’s annual volume by its rupee value.
• Compute each item’s percentage of the total inventory in
terms of annual usage in rupees.
• Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
• Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
• The next 70% of all items with the lowest rupee
percentages are “C” items.

101. Advantages of ABC Classification
• Helps to exercise selective control
• Gives rewarding results quickly
• Helps to point out obsolete stocks easily.
• In case of “A” items careful attention can be paid at every step
such as estimate of requirements, purchase, safety stock,
receipts, inspections, issues, etc. & close control is
maintained.
• In case of “C” items, recording & follow up, etc. may be
dispensed with or combined.
• Helps better planning of inventory control
• Provides sound basis for allocation of funds & human
resources.

102. Disadvantages of ABC Analysis
• Proper standardization & codification of inventory
items needed.
• Considers only money value of items & neglects the
importance of items for the production process or
assembly or functioning.
• Periodic review becomes difficult if only ABC analysis
is recalled.
• When other important factors make it obligatory to
concentrate on “C” items more, the purpose of ABC
analysis is defeated.

103. Group No. of Items (%) Inventory Value
(%)
A 10 70
B 20 20
C 70 10

105. • ‘Item A’ forms the minimum proportion (10%)
of the total units of inventory, but represents
the highest in term of value ie 70%.
• On the other hand ‘Item C’ represents more
than half the total number of inventory and is
merely 10% in terms of investment required.
No strict control is therefore required in case
of ‘Item C’
• For ‘Item B’ moderate control is required.

106. JUST-IN-TIME (JIT)
The JIT control system implies that the firm should maintain a
minimal level of inventory and rely on suppliers to provide
parts and components ‘just-in-time’ to meet its assembly
requirements.
Just In time (JIT) system of inventory management gained
popularity from Japan. It is one of the important
components of Total Quality Management (TQM).
In a JIT system, inventory is not maintained. Material,
manufacturing parts and other components are ordered as
and when the need arise and arrives at the site just before
few hours they are put into use.
Successful implementation of JIT ensures savings in
warehousing cost, the cost of deterioration and the cost of
funds blocked in inventory.

107. • According to Voss, JIT is viewed as a “Production methodology
which aims to improve overall productivity through elimination
of waste and which leads to improved quality”.
• JIT provides an efficient production in an organization and
delivery of only the necessary parts in the right quantity, at the
right time and place while using the minimum facilities”.
Implementing JIT is not a very easy task. It requires perfect
synchronization between the delivery of material and
manufacturing cycle. The relationship between the supplier
and the manufacturer also has a crucial role to play in terms of
timing of delivery and quality of the material.
Delay in delivery of material or substandard quality supply may
result in stoppage of production. This system creates lot of
pressure on the manufacturer as well as the supplier and
demand for a strong supply chain management.

108. JIT Objectives
• Receive supplies just in time to be used.
• Produce parts just in time to be made into
subassembly.
• Produce subassemblies just in time to be
assembled into finished products.
• Produce and deliver finished products just in
time to be sold.

109. Advantages of JIT
1. Exact delivery schedule is possible with JIT practices.
2. Quality of product is improved.
3. Lower defect rates i.e. lower inspection cost.
4. Lower raw material inventory, in process inventory and finished
product inventory resulting lower product cost.
5. Satisfying market demand without delay in delivery.
6. Flexibility in utilizing manpower as workers is trained to do many
jobs.
7. JIT helps in effective communication and reduce waste.
8. Less shop floor space is required.
9. Employee morale is high in an efficient working environment.
10. JIT reduces scrap and need for rework.

110. MATERIAL HANDING EQUIPMENTS
1. CONVEYORS
Conveyors are useful for moving material between two fixed
workstations, either continuously or intermittently. They
are mainly used for continuous or mass production
operations—indeed, they are suitable for most operations
where the flow is more or less steady. Conveyors may be of
various types, with rollers, wheels or belts to help move the
material along: these may be power-driven or may roll
freely. The decision to provide conveyors must be taken
with care, since they are usually costly to install; moreover,
they are less flexible and, where two or more converge, it is
necessary to coordinate the speeds at which the two
conveyors move.

113. 2. INDUSTRIAL TRUCKS
Industrial trucks are more flexible in use than conveyors
since they can move between various points and are
not permanently fixed in one place. They are,
therefore, most suitable for intermittent production
and for handling various sizes and shapes of material.
There are many types of truckpetrol- driven, electric,
hand-powered, and so on. Their greatest advantage lies
in the wide range of attachments available; these
increase the trucks ability to handle various types and
shapes of material.

115. 3. CRANES AND HOISTS
The major advantage of cranes and hoists is that
they can move heavy materials through overhead
space. However, they can usually serve only a
limited area. Here again, there are several types
of crane and hoist, and within each type there are
various loading capacities. Cranes and hoists may
be used both for intermittent and for continuous
production.

118. 4. CONTAINERS
These are either ‘dead’ containers (e.g. Cartons,
barrels, skids, pallets) which hold the material
to be transported but do not move
themselves, or ‘live’ containers (e.g. wagons,
wheelbarrows or computer self-driven
containers). Handling equipments of this kind
can both contain and move the material, and
is usually operated manually.

119. 5. ROBOTS
Many types of robot exist. They vary in size, and in
function and manoeuvrability. While many robots
are used for handling and transporting material,
others are used to perform operations such as
welding or spray painting. An advantage of robots
is that they can perform in a hostile environment
such as unhealthy conditions or carry on arduous
tasks such as the repetitive movement of heavy
materials.