MET 305 2019 SCHEME MODULE 2 COMPLETE.pptx

VALUE ANALYSIS, VALUE
ENGINEERING & INVENTORY
MANAGEMENT
MODULE 2
SESSION1
VINAY B . NSSCE 1

VINAY B . NSSCE 2
INTRODUCTION
•THE AIM IS TO UNDERSTAND STRATEGIES TO REDUCE COST WHILE
MAINTAINING OR IMPROVING QUALITY.
•CONCEPTS LIKE VALUE ANALYSIS, VALUE ENGINEERING, PURCHASING,
AND INVENTORY ARE VITAL TO PRODUCT AND OPERATIONS SUCCESS.
•THESE TECHNIQUES ARE APPLICABLE ACROSS INDUSTRIES INCLUDING
MANUFACTURING, SERVICES, AND RETAIL.
•EFFICIENT VALUE AND INVENTORY MANAGEMENT DIRECTLY IMPROVE
PRODUCTIVITY AND PROFITABILITY.

VINAY B . NSSCE 3
VALUE ANALYSIS – DEFINITION & IMPORTANCE
• VALUE ANALYSIS IS A SYSTEMATIC METHOD TO IMPROVE THE
"VALUE" OF A PRODUCT BY ANALYZING ITS FUNCTION.
• IT FOCUSES ON REDUCING UNNECESSARY COSTS WITHOUT
AFFECTING PRODUCT QUALITY AND FUNCTION.
• ORIGINALLY DEVELOPED BY LAWRENCE MILES AT GENERAL ELECTRIC
DURING WORLD WAR II.
• IT HELPS ORGANIZATIONS BECOME MORE COST-EFFECTIVE AND
CUSTOMER-FOCUSED.

VINAY B . NSSCE 4
Value analysis (VA) is a tool to enhance cost efficiency
by evaluating the functionality of a product or a
process about its cost. It helps identify and eliminate
unnecessary costs incurred while making a product or
conducting a business function.

VINAY B . NSSCE 5
STEPS IN VALUE ANALYSIS
•INFORMATION PHASE – UNDERSTAND THE CURRENT PRODUCT DESIGN, COST, AND
FUNCTIONS.
•FUNCTION ANALYSIS PHASE – BREAK DOWN PRODUCT INTO ESSENTIAL AND
SECONDARY FUNCTIONS.
•CREATIVE PHASE – BRAINSTORM ALTERNATIVE WAYS TO PERFORM THE SAME
FUNCTIONS.
•EVALUATION PHASE – JUDGE ALL ALTERNATIVES FOR FEASIBILITY AND
EFFECTIVENESS.
•DEVELOPMENT PHASE – DEVELOP CHOSEN ALTERNATIVES INTO VIABLE SOLUTIONS.
•IMPLEMENTATION PHASE – APPLY THE SELECTED CHANGES AND MONITOR THE
RESULTS.

VINAY B . NSSCE 6
VALUE ENGINEERING – CONCEPT & OBJECTIVES
•VALUE ENGINEERING IS APPLIED DURING THE PRODUCT DESIGN OR
DEVELOPMENT STAGE.
•IT AIMS TO IMPROVE VALUE BY OPTIMIZING FUNCTION AND REDUCING
LIFECYCLE COST.
•IT INVOLVES MULTIDISCIPLINARY TEAMWORK AND INNOVATION.
•HELPS ELIMINATE FEATURES THAT DO NOT CONTRIBUTE TO CUSTOMER
VALUE. https://youtu.be/OLwmq8pMKdo

VINAY B . NSSCE 7
VALUE ANALYSIS VS. VALUE ENGINEERING

VINAY B . NSSCE 8
DIFFERENTIATION – CONCEPT AND NEED
•DIFFERENTIATION MEANS MAKING A PRODUCT DISTINCT FROM
COMPETITORS.
•IT CAN BE BASED ON DESIGN, QUALITY, DURABILITY, FEATURES,
OR CUSTOMER SERVICE.
•ENABLES PREMIUM PRICING AND REDUCES PRICE SENSITIVITY.
•ENCOURAGES BRAND LOYALTY AND CREATES A UNIQUE MARKET
SPACE.

VINAY B . NSSCE 10
DIFFERENTIATION – TYPES
•PRODUCT DIFFERENTIATION – UNIQUE FEATURES, QUALITY,
PERFORMANCE (E.G., APPLE IPHONES).
•SERVICE DIFFERENTIATION – WARRANTY, INSTALLATION, AFTER-
SALES SUPPORT.
•IMAGE DIFFERENTIATION – STRONG BRANDING, ADVERTISING,
AND EMOTIONAL APPEAL.
•PERSONNEL DIFFERENTIATION – SKILLED AND TRAINED
WORKFORCE DELIVERING SUPERIOR SERVICE.

VINAY B . NSSCE 11
MAKE-OR-BUY DECISION – INTRODUCTION
•A STRATEGIC DECISION ABOUT WHETHER TO
MANUFACTURE A COMPONENT IN-HOUSE OR BUY FROM
OUTSIDE.
•INVOLVES ANALYSIS OF COST, CAPABILITY, CAPACITY, AND
STRATEGIC CONTROL.
•INFLUENCES QUALITY CONTROL, SUPPLY CHAIN STABILITY,
AND INNOVATION.

VINAY B . NSSCE 12
MAKE-OR-BUY – DECISION CRITERIA
• COST FACTORS: COMPARE
TOTAL COST OF
MANUFACTURING VS.
OUTSOURCING.
• CORE COMPETENCY: FOCUS ON
STRENGTHS AND OUTSOURCE
NON-CORE ACTIVITIES.
• CONFIDENTIALITY: PROTECT
INTELLECTUAL PROPERTY BY
KEEPING PRODUCTION IN-
HOUSE.
• FLEXIBILITY: BUYING GIVES
FLEXIBILITY IN VOLUME AND
DESIGN CHANGES.
• QUALITY CONTROL: MAKING
ENSURES TIGHTER QUALITY
STANDARDS AND TRACEABILITY.

VINAY B . NSSCE 14
PURCHASING PROCEDURE – STEP-BY-STEP
•IDENTIFICATION OF NEED – RECOGNIZING THE REQUIREMENT OF MATERIALS OR SERVICES.
•PURCHASE REQUISITION – INTERNAL DOCUMENT TO REQUEST PROCUREMENT.
•SUPPLIER SELECTION – FIND RELIABLE SUPPLIERS BASED ON QUALITY AND COST.
•REQUEST FOR QUOTATION (RFQ) – ASK MULTIPLE SUPPLIERS FOR PRICE AND TERMS.
•PURCHASE ORDER – LEGAL DOCUMENT SENT TO THE SELECTED SUPPLIER.
•RECEIVING GOODS – INSPECT FOR QUANTITY AND QUALITY.
•INVOICE VERIFICATION & PAYMENT – CROSS-CHECK INVOICE WITH PO AND GOODS
RECEIVED.

VINAY B . NSSCE 15
PURCHASING TECHNIQUES
•CENTRALIZED PURCHASING: ONE DEPARTMENT HANDLES ALL
PURCHASES; ENSURES STANDARDIZATION AND COST CONTROL.
•DECENTRALIZED PURCHASING: EACH DEPARTMENT OR UNIT
MANAGES ITS OWN PROCUREMENT.
•E-PROCUREMENT: USE OF ONLINE PLATFORMS TO STREAMLINE AND
AUTOMATE PURCHASING. Eg:Government e-Marketplace (GeM) – India, SAP
Ariba, Amazon Business
•JUST-IN-TIME (JIT): MATERIALS ORDERED EXACTLY WHEN NEEDED;
MINIMIZES INVENTORY.
•RATE CONTRACTS: LONG-TERM FIXED PRICE AGREEMENT WITH
RELIABLE VENDORS

VINAY B . NSSCE 16
INVENTORY MANAGEMENT – NEED AND
OBJECTIVES
• INVENTORY MANAGEMENT ENSURES THE RIGHT QUANTITY OF
MATERIALS IS AVAILABLE AT THE RIGHT TIME.
• REDUCES CARRYING COSTS AND PREVENTS BOTH OVERSTOCKING
AND STOCKOUTS.
• IMPROVES CUSTOMER SERVICE BY ENSURING AVAILABILITY.
• HELPS IN EFFICIENT WORKING CAPITAL UTILIZATION.

VINAY B . NSSCE 18
FUNCTIONS OF INVENTORY
•BUFFER FUNCTION: PROTECTS AGAINST SUPPLY CHAIN DISRUPTIONS.
•SEASONAL DEMAND FULFILLMENT: STORES STOCK FOR HIGH-
DEMAND SEASONS.
•BULK PURCHASING: ENABLES ECONOMIES OF SCALE THROUGH BULK
PROCUREMENT.
•SMOOTH PRODUCTION: DECOUPLES PRODUCTION PROCESSES BY
ENSURING MATERIAL FLOW.

VINAY B . NSSCE 19
CLASSIFICATION OF INVENTORIES
•BY STAGE: RAW MATERIALS, WORK-IN-PROGRESS (WIP), FINISHED
GOODS.
•BY USAGE: MAINTENANCE, REPAIR & OPERATIONS (MRO).
•BY IMPORTANCE: VITAL, ESSENTIAL, DESIRABLE (VED).
•BY MOVEMENT: FAST, SLOW, NON-MOVING (FSN)

VINAY B . NSSCE 20
DIRECT VS. INDIRECT INVENTORY

VINAY B . NSSCE 21
TYPES OF INVENTORY COSTS
•ORDERING COST: COST OF PLACING ORDERS – PAPERWORK,
FOLLOW-UPS.
•HOLDING COST: STORAGE, INSURANCE, DEPRECIATION, SPACE
USAGE.
•STOCKOUT COST: LOSS FROM UNAVAILABILITY OF INVENTORY –
LOST SALES, IDLE TIME.
•PURCHASE COST: PRICE PAID TO SUPPLIERS.
•SETUP COST: COST INCURRED TO PREPARE FOR PRODUCTION RUNS.

VINAY B . NSSCE 23
INVENTORY MANAGEMENT TECHNIQUES
•ABC ANALYSIS: FOCUS ON HIGH-VALUE ITEMS (A), MEDIUM (B),
LOW-VALUE (C).
•EOQ (ECONOMIC ORDER QUANTITY): DETERMINES THE OPTIMAL
ORDER SIZE.
•REORDER LEVEL: MINIMUM LEVEL AT WHICH NEW ORDER SHOULD
BE PLACED.
•VED ANALYSIS: HELPS IN CLASSIFYING ITEMS BASED ON
CRITICALITY.
•JIT: INVENTORY ARRIVES JUST IN TIME; REDUCES HOLDING COST.

VINAY B . NSSCE 24
EOQ – ECONOMIC ORDER QUANTITY

VINAY B . NSSCE 25
INVENTORY MODELS
• 1. Deterministic vs. Probabilistic Models
• Deterministic Models: All parameters (demand, lead time, etc.)
are known and constant.
• Example: If a factory knows it needs exactly 500 units every month, it uses a
deterministic model.
• Probabilistic Models: At least one parameter (typically demand or
lead time) is uncertain and described by probability distribution.
• Example: A retailer faces uncertain customer demand, so it uses safety stock
to buffer against variability.

VINAY B . NSSCE 26
• Single-Period vs. Multi-Period Models
• Single-Period Model: Decisions for only one period; often used for
perishable items.
• Example: Ordering daily newspapers or seasonal fashion items.
• Multi-Period Model: Repeated decisions over multiple periods;
deals with long-term inventory.
• Example: Grocery stores stocking staple items like rice or flour.

VINAY B . NSSCE 27
COMMON INVENTORY SYSTEMS
• Q-system (Continuous Review): Monitor inventory constantly, reorder a
fixed quantity when stock falls to a specific level.
• P-system (Periodic Review): Check stock at regular intervals, order up to a
target level.
• Optional Replenishment System: Regular checks, but orders only placed if
inventory falls below a threshold.
• One-bin System: All inventory in one location, reorder when bin is empty.
• Two-bin System: Inventory split into two bins; start using second bin when
first is empty and reorder.

VINAY B . NSSCE 28
ECONOMIC ORDER QUANTITY (EOQ)
• What is EOQ?
• Economic Order Quantity (EOQ) is the optimal order size that
minimizes total inventory costs—including both ordering (setup)
and holding (carrying) costs.
• Widely used in manufacturing, retail, and inventory management
to avoid excess stock while ensuring demand is met.

VINAY B . NSSCE 30
ASSUMPTIONS OF EOQ MODEL
• Constant and known demand rate.
• Constant lead time (time between order and delivery).
• No stockouts (shortages) allowed.
• Instantaneous order receipts (inventory arrives all at once).
• Only relevant costs are ordering and holding costs.
• No bulk discounts; unit cost is constant

VINAY B . NSSCE 31
PROBLEMS
Q1 : The demand for an item is 8000 units per annum
and the unit cost is Rs. 120. The inventory carrying
charges are of 20% of average inventory cost and
ordering cost is Rs. 1250 per order. Calculate optimal
order quantity, optimal order time, optimal inventory,
optimal inventory cost and number of orders.

VINAY B . NSSCE 35
PROBLEM
• A precision engineering company consumes 80,000 units of a
component per year. The ordering, receiving and handling costs
are rupees 300 per order. While trucking cost is Rupees 1200 per
order. Further details are as follows. Interest cost rupees 8 per
unit per year. Deterioration and obsolescence cost Rs. 0.4 per unit
per year. Storage cost would be Rs 9,000 per year for 80,000 units.
Calculate economic order quantity and total inventory.

VINAY B . NSSCE 40
INVENTORY CONTROL SYSTEMS
• Inventory Control Systems are processes and technologies used by
organizations to manage inventory levels efficiently — ensuring the
right quantity of stock is available at the right time, minimizing
costs while meeting customer demand.
• Objectives of Inventory Control Systems
• Maintain optimal inventory levels.
• Minimize storage and carrying costs.
• Avoid stockouts and overstocking.
• Improve order fulfillment and customer satisfaction.
• Enable accurate planning and forecasting.

VINAY B . NSSCE 41
Key Components of an Inventory
Control System
• Inventory Management Software
(ERP systems)
• Barcode/RFID Scanners
• Warehouse Management Systems
(WMS)
• Reorder Point (ROP)
• Economic Order Quantity (EOQ)
Challenges in Inventory Control
• Demand fluctuations
• Lead time variability.
• Data inaccuracies
• Overstock or understock risks.
• Managing obsolete or slow-
moving inventory.
Technological Trends in Inventory
Control
• IoT & RFID for real-time stock
monitoring.
• AI/ML for demand forecasting
and automation
• Cloud-Based Inventory
Solutions for remote access and
integration
• Blockchain for secure and
transparent tracking.
Performance Metrics
• Inventory Turnover Ratio
• Carrying Cost of Inventory
• Stockout Rate
• Order Accuracy Rate
• Cycle Time

VINAY B . NSSCE 42
TYPES OF INVENTORY CONTROL SYSTEMS
• Q-SYSTEM (CONTINUOUS)

VINAY B . NSSCE 44
WHAT IS Q SYSTEM?
• Also called Fixed Order Quantity System.
• Inventory levels are continuously monitored.
• A fixed quantity (Q) is ordered when inventory falls to reorder
point (ROP).
• Objective: Prevent stockouts while minimizing carrying costs.

VINAY B . NSSCE 45
ADVANTAGES AND DISADVANTAGES
• Advantages of Q System
• Less chance of stockouts due to
continuous review
• Lower average inventory compared
to P-System
• Optimizes ordering using EOQ
• Suitable for high-value or critical
items
• Disadvantages of Q System
• Continuous monitoring is resource-
intensive
• Not suitable when demand is highly
uncertain
• May be complex to implement
without software
• Risk of misjudging reorder point if
lead time fluctuates

VINAY B . NSSCE 46
APPLICATIONS
• Manufacturing Industry
• Critical machine
components (e.g.,
bearings, motors)
• Maintenance, Repair &
Operations (MRO) items
• Downtime is costly Q
→
system avoids stockouts.
• Healthcare Sector
• Essential medical supplies
(e.g., gloves, syringes,
surgical tools)
• Life-saving drugs (e.g.,
insulin, epinephrine)
• Continuous availability is
critical Q system
→
ensures reliability.
• Automotive Industry
• Spare parts with steady
demand (e.g., filters,
brake pads)
• Smooth supply chain
operations require well-
maintained inventory.
• Retail & E-Commerce
(Selective Items)
• For premium or slow-
moving items (e.g.,
designer watches, high-
end electronics)
• Stocking must be
balanced to reduce
holding costs without
losing sales.

VINAY B . NSSCE 47
Q SYSTEM WITH SAFETY STOCK
• Safety stock added to ROP to absorb variability.
• New ROP = (Average demand × Lead time) + Safety stock
• Reduces risk of stockouts during unexpected demand spikes or lead
time delays.

VINAY B . NSSCE 48
P SYSTEM
• Periodic Review Inventory System
• Definition: Inventory is reviewed at fixed time intervals, and orders are
placed to bring stock up to a desired level.
• Example: Every Monday, you check stock and order enough to reach 100
units.

VINAY B . NSSCE 50
HOW P-SYSTEM WORKS
• Set a review period (P) (e.g., weekly, monthly).
• At each review, check inventory level.
• Order quantity = Target inventory level − Current stock.
• Repeat the process at the next review period.

VINAY B . NSSCE 51
FORMULA USED
• Target Level (T) = Expected demand
during lead time + Expected demand
during review period + Safety stock
• Order Quantity = T Current
−
Inventory
• Suitable when:
• Orders can only be placed at specific
intervals (e.g., supplier policy).
• Stock checking is time-consuming or
expensive.
• Multiple items are ordered together.

VINAY B . NSSCE 52
ADVANTAGES AND DISADVANTAGES
•Advantages of P-System
•Simple to manage – regular review
intervals.
•Suitable for bulk ordering of multiple
items.
•Lower monitoring costs.
•Useful when exact timing of demand
isn’t critical.
•Disadvantages of P-System
•Higher safety stock needed due to
longer uncertainty.
•Risk of stockouts between review
periods.
•Not ideal for high-value or fast-moving
items.

VINAY B . NSSCE 53
REAL-WORLD EXAMPLE
• Supermarket chain: Reviews inventory of non-perishable items every Sunday.
• Orders enough to refill shelves till next Sunday.

VINAY B . NSSCE 54
RE-ORDER LEVEL AND BUFFER STOCK
• Definition:
The Re-order Level (ROL) is the inventory level at which a new order must be
placed to replenish stock before it runs out.
• Purpose:
To ensure continuous production or sales without stockouts.

VINAY B . NSSCE 55
BUFFER STOCK – CONCEPT
• Definition:
Buffer stock, also known as Safety Stock, is the extra inventory kept to protect
against uncertainties in demand or delays in supply.
• Purpose:
Acts as a cushion during supply chain disruptions or demand surges.

VINAY B . NSSCE 60
SELECTIVE INVENTORY CONTROL & JUST IN TIME
MANUFACTURING
• Systematic approach to obtaining, storing, and using inventory to
meet demand while minimizing costs.
• Maintain adequate supply without excessive surplus.
• Problems without control: Overstocking, obsolescence, stockouts,
high carrying cost.

VINAY B . NSSCE 61
WHAT IS SELECTIVE INVENTORY CONTROL?
• Not all inventory items are equally important – prioritize
items based on impact on business.
• Focus efforts on critical items to optimize cost and
service.
• Key Idea: “Different items, different controls.”

VINAY B . NSSCE 62
NEED FOR SELECTIVE INVENTORY CONTROL
•Vast number of stock items different usage rates & values.
→
•Prevents wastage of managerial time on trivial items.
•Helps identify items needing strict monitoring.
•Improves working capital utilization.

VINAY B . NSSCE 63
TYPES OF SELECTIVE INVENTORY CONTROL
•ABC Analysis – Based on annual consumption value.
•VED Analysis – Based on criticality for operations.
•XYZ Analysis – Based on value fluctuation & inventory
records accuracy.

VINAY B . NSSCE 64
ABC ANALYSIS SECTION
•Also called: Always Better Control
•Principle: Small % of items large % of consumption
→
value.
•Categories:
•A: High-value, low-quantity items (~10% items ~70%
→
value)
•B: Moderate-value items (~20% items ~20% value)
→
•C: Low-value, high-quantity items (~70% items ~10%
→
value)

VINAY B . NSSCE 65
ABC ANALYSIS: PROCEDURE
• List all items in inventory.
• Calculate annual consumption value = Unit price × Annual usage.
• Arrange items in descending order of consumption value.
• Calculate cumulative total % of consumption value.
• Classify into A, B, C based on cumulative % cut-off.
• Apply control measures accordingly.

VINAY B . NSSCE 66
ABC ANALYSIS: CONTROL MEASURES
• A Items:
• Strict control, frequent review, accurate forecasting.
• B Items:
• Moderate control, periodic review.
• C Items:
• Simple controls, bulk ordering, less monitoring.

VINAY B . NSSCE 68
VED ANALYSIS SECTION
• Basis: Criticality to operations (especially in maintenance & spare
parts).
• Categories:
• Vital (V): Non-availability stops operations entirely.
• Essential (E): Short-term effect if unavailable.
• Desirable (D): Minimal impact if unavailable.

VINAY B . NSSCE 69
VED ANALYSIS: PROCEDURE
• Identify all inventory items (especially spares).
• Evaluate each item’s role in operation.
• Categorize into Vital, Essential, Desirable.
• Allocate resources accordingly:
• Vital No stockouts tolerated.
→
• Essential Maintain moderate stock.
→
• Desirable Low stock priority.
→

VINAY B . NSSCE 71
XYZ ANALYSIS: CONCEPT
•Value of inventory in storage at any time or stock record
accuracy.
•Categories:
•X: High-value inventory tight control.
→
•Y: Medium-value inventory periodic control.
→
•Z: Low-value inventory minimal control.
→

VINAY B . NSSCE 72
XYZ ANALYSIS: APPLICATION
•Identifies dormant & obsolete stock.
•Useful for inventory verification & audits.
•Often combined with ABC & VED for multi-dimensional
control.

VINAY B . NSSCE 73
JUST IN TIME MANUFACTURING
• A production strategy to receive goods only as they are
needed, reducing inventory costs.
• Origin: Developed by Toyota (Japan) in the 1970s.
• Goal: Eliminate waste, improve efficiency, ensure quality.

VINAY B . NSSCE 74
PRINCIPLES OF JIT
• Produce only what is needed, when needed, in the
required quantity.
• Zero inventory where possible.
• Continuous improvement in processes.

VINAY B . NSSCE 76
INVOLVEMENT OF PEOPLE IN JIT
• Role of employees:
• Cross-functional skills.
• Active problem-solving participation.
• Commitment to quality & continuous improvement.
• Management role:
• Empowerment & training.
• Clear communication of goals.

VINAY B . NSSCE 77
TOTAL QUALITY CONTROL (TQC) IN JIT
• Integration with JIT:
• Quality at every stage – no defective units passed forward.
• Immediate defect detection & correction.
• Methods:
• Statistical process control.
• Worker self-inspection.

VINAY B . NSSCE 78
IT FLOW OF MATERIALS
•Pull system using Kanban cards/signals.
•Materials supplied only when needed in
production line.
•Minimizes work-in-progress (WIP) inventory.

VINAY B . NSSCE 79
BENEFITS OF JIT
• Reduced inventory costs.
• Improved quality.
• Faster response to market demand.
• Better space utilization.
• Higher employee involvement & morale.

VINAY B . NSSCE 80
FLOW:
Supplier Small lot delivery Production cell
→ → →
Immediate use Next stage
→
No storage between processes.

VINAY B . NSSCE 81
CONCLUSION
• Selective inventory control ensures focus on critical
items.
• ABC, VED, XYZ analyses help optimize resources.
• JIT integrates production and inventory to minimize
waste.
• Success depends on discipline, cooperation, and
continuous improvement.

MET 305 2019 SCHEME MODULE 2 COMPLETE.pptx

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