Module 4_Session 4_Operations Management

1. Inventory Management &
Quality Methodologies
Module 4

3. Economic Order Quantity
Economic order quantity (EOQ) is the ideal quantity of units a company
should purchase to meet demand while minimizing inventory costs
such as holding costs, shortage costs, and order costs.
This production-scheduling model was developed in 1913 by Ford W.
Harris and has been refined over time.
The economic order quantity formula assumes that demand, ordering,
and holding costs all remain constant.

4. Formula for Calculating Economic
Order Quantity (EOQ)

5. Why Is Economic Order Quantity
(EOQ) Important?
• The goal of the EOQ formula is to identify the optimal number of
product units to order. If achieved, a company can minimize its costs
for buying, delivering, and storing units.
• The EOQ formula can be modified to determine different production
levels or order intervals, and corporations with large supply chains
and high variable costs use an algorithm in their computer software
to determine EOQ.
• EOQ is an important cash flow tool. The formula can help a company
control the amount of cash tied up in the inventory balance.
• If EOQ can help minimize the level of inventory, the cash savings can
be used for some other business purpose or investment.

6. Why Is Economic Order Quantity
(EOQ) Important?
• The EOQ formula determines the inventory reorder point of a
company. When inventory falls to a certain level, the EOQ formula, if
applied to business processes, triggers the need to place an order for
more units.
• By determining a reorder point, the business avoids running out of
inventory and can continue to fill customer orders.
• If the company runs out of inventory, there is a shortage cost, which is
the revenue lost because the company has insufficient inventory to fill
an order. An inventory shortage may also mean the company loses
the customer or the client will order less in the future.

7. Example of How to Use EOQ
• EOQ takes into account the timing of reordering, the cost
incurred to place an order, and the cost to store merchandise. If
a company is constantly placing small orders to maintain a
specific inventory level, the ordering costs are higher, and there
is a need for additional storage space.
• Assume, for example, a retail clothing shop carries a line of
men’s jeans, and the shop sells 1,000 pairs of jeans each year.
It costs the company Rs. 500 per year to hold a pair of jeans in
inventory, and the fixed cost to place an order is Rs. 200.

8. Example of How to Use EOQ
• The EOQ formula is the square root of (2 x 1,000 pairs x Rs.
200 order cost) / (Rs. 500 holding cost) or 28.3 with rounding.
• The ideal order size to minimize costs and meet customer
demand is slightly more than 28 pairs of jeans. A more complex
portion of the EOQ formula provides the reorder point.

9. Benefits of Economic Order Quantity
(EOQ)
• Improved Order Fulfillment: When you need a certain item or something
for a customer order, optimal EOQ ensures the product is on hand,
allowing you to get the order out on time and keep the customer happy.
This should improve the customer experience and may lead to increased
sales.
• Less Overordering: An accurate forecast of what you need and when will
help you avoid overordering and tying up too much cash in inventory.
• Less Waste: More optimized order schedules should cut down on
obsolete inventory, particularly for businesses that hold perishable
inventories that can result in dead stock.
• Lower Storage Costs: When your ordering matches your demand, you
should have less products to store. This can lower real estate, utility,
security, insurance and other related costs.
• Quantity Discounts: Planning and timing your orders well allows you to
take advantage of the best bulk order or quantity discounts offered by your
vendors.

10. Total Quality Management
• Total quality management (TQM) is the continual process of
detecting and reducing or eliminating errors in manufacturing.
• It streamlines supply chain management, improves the customer
experience, and ensures that employees are up to speed with
training.
• Total quality management aims to hold all parties involved in the
production process accountable for the overall quality of the final
product or service.
• This management approach is used to simplify supply chain
management, as well as to detect, reduce or remove errors. TQM
requires organizations to focus on continuous improvement, or
Kaizen. TQM focuses on continual internal and process
improvements over the long term, thereby enhancing the quality of
produced products or services.

12. Primary Principles of Total Quality
Management
• Focus on Customers
• Under TQM, your customers define whether your products are high quality.
Customer input is highly valued because it allows a company to better
understand the needs and requirements in the manufacturing process. Customer
surveys may reveal insufficient durability of goods. This input is then fed back into
TQM systems to implement better raw material sourcing, manufacturing
processes, and quality control procedures.
• Commitment by Employees
• Employees must buy into the processes and system if TQM is going to be
successful. This includes clearly communicating across departments and leaders
what goals, expectations, needs, and constraints are in place. A company
adopting TQM principles must be willing to train employees and give them
sufficient resources to complete tasks successfully and on time. TQM also strives
to reduce attrition and maintain knowledgeable workers.

13. Primary Principles of Total Quality
Management
• Improve Continuously
• A company should gradually evolve and strive for incremental, small
improvements as it learns more about its customers, processes, and
competition. This concept of continuous improvement helps a company
adapt to changing market expectations. It allows for greater adaptability to
different products, markets, customers, or regions. Continuous
improvement also drives and widens the competitive advantage that a
company has built over related companies.
• Adherence to Processes
• TQM's systematic approach relies heavily on process flowcharts, TQM
diagrams, visual action plans, and documented workflows. Every member
engaged in the process must be aware and educated on their part of the
process to ensure proper steps are taken at the right time of production.
These processes are then continually analyzed to better understand
deficiencies in the process.

14. Primary Principles of Total Quality
Management
• Strategic and Systematic Approach
• A company's processes and procedures should be a direct reflection of the
organization's vision, mission, and long-term plan. TQM calls for a system
approach to decision making that requires that a company dedicate itself
to integrating quality as its core component and making the appropriate
financial investments to make that happen.
• Data Utilization
• The systematic approach of TQM only works if feedback and input is given
to evaluate how the process flow is moving. Management must continually
rely on production, turnover, efficiency, and employee metrics to correlate
the anticipated outcomes with the actual results. TQM relies heavily on
documentation and planning, and only by utilizing and analyzing data can
management understand if those plans are being met.

15. Primary Principles of Total Quality
Management
• Integrate Systems
• One way to utilize data is to integrate systems. TQM strategies believe
systems should talk to each other, conveying useful information across
departments and making smart decisions. When goods or inventory are
used in one area, another department should have immediate access to
that ERP information. TQM strives to allow everyone to be on the same
page at the same time by linking data sources and sharing information
across systems.
• Communication
• Data may transfer between departments freely, but there is a human
element to coordinating processes and making sure an entire production
line is operating efficiently. Effective communication plays a large part in
TQM to motivate employees, educate members along a process, and
avoid process errors whether it is normal day-to-day operations or large
organizational changes.

16. Total Quality Management – Pros &
Cons
Pros
• Delivers stronger, higher quality products to customers
• Results in lower company-wide costs
• Minimizes waste throughout the entire production and sale process
• Enables a company to become more adaptable
Cons
• May require substantial financial investment to convert to TQM
practices
• Often requires conversion to TQM practices over a long period of
time
• May be met with resistance to change
• Requires company-wide buy-in to be successful

17. Example of Total Quality Management
• Perhaps the most famous example of TQM is Toyota's
implementation of the kanban system. A kanban is a physical signal
that creates a chain reaction, resulting in a specific action. Toyota
used this idea to implement its just-in-time (JIT) inventory process.
• The company decided to keep just enough inventory on hand to fill
customer orders as they were generated to make its assembly line
more efficient. All parts of Toyota's assembly line are therefore
assigned a physical card that has an associated inventory number.
• The card is removed and moved up the supply chain right before a
part is installed in a car, effectively requesting another of the same
part. This allows the company to keep its inventory lean and not
overstock unnecessary assets. Effective quality management
resulted in better automobiles that could be produced at an
affordable price.

18. Essential requirements for successful
implementation of TQM
• Commitment: Quality improvement (in all aspects) must be
everyone's’ job in the organization. An apparent commitment from
the top management, breaking down the barriers for continuous
quality improvement and steps required to provide an environment
for changing attitudes must be provided. Training and support for this
should be extended.
• Culture: There should be proper training to effect the changes in
attitude and culture.
• Continuous Improvement: Recognize improvement as a
continuous process, and not merely a one-off program.
• Customer Focus: Perfection in service with zero defects and full
satisfaction to the end-user whether it’s internal or external.

19. Essential requirements for successful
implementation of TQM
• Control: Ensure monitoring and control checks for any
deviation from the intended course of implementation.
• Plan
• Do
• Check
• Act
This is also referred to as the PDCA cycle.

20. Essential requirements for successful
implementation of TQM
• Planning Phase: This phase is the most crucial phase of total quality
management. Under this phase, employees have to come up with their
respective queries and problems which need to be addressed. The employees
apprise the management of different challenges which they are facing in their day
to day operations and also analyze the root cause of the problem. They need to
do the required research and collect significant data which would help them find
solutions to all the problems.
• Doing Phase: In this phase, a solution for the identified problems in the planning
phase is developed by the employees. Strategies are devised and implemented
to crack down the challenges faced by employees. The efficiency and
effectiveness of solutions and strategies are also evaluated in this stage.
• Checking Phase: Under this phase, a comparison analysis of before and after is
done in order to assess the effectiveness of the processes and measure the
results.
• Acting Phase: This is the last phase of the cycle, in this phase employees