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# Materials Management @ NI MSME # By SN Paniigrahi
- 2. 2 Participants Executives of NMDC SN Panigrahi
- 3. 3 SN Panigrahi is a Versatile Practitioner, Strategist, Energetic Coach, Learning Enabler & Public Speaker. He is an International-Corporate Trainer, Mentor & Author He has diverse experience and expertise in Project Management, Contract Management, Supply Chain Management, Procurement, Strategic Sourcing, Global Sourcing, Logistics, Exports & Imports, Indirect Taxes – GST etc. He had done more than 100 Workshops on above He is an Engineer + MBA +PGD ISO 9000 / TQM with around 29 Yrs of Experience He is a certified PMP® from PMI (USA) and become PMI India Champion Also a Certified Lean Six Sigma Green Belt from Exemplar Global Trained in COD for 31/2 Yrs. on Strategy & Leadership GST Certified – MSME – Tech. Dev. Centre (Govt of India) ZED Consultant – Certified by QCI – MSME (Govt of India) Member Board of Studies, IIMM Co-Chairman, Indirect Tax Committee, FTCCI Empanelled Faculty in NI MSME He has shared his domain expertise in various forums as a speaker & presented a number of papers in various national and international public forums and received a number of awards for his writings and contribution to business thoughts. SN Panigrahi 9652571117 snpanigrahi1963@gmail.com Hyderabad
- 5. 5 Introduction & Definition Objective and importance Principles of Material Management Functions of Material Management Materials – Quality and Quantity Value Analysis Purchasing Vendor Development Buying Techniques Purchasing cycles and procedure Advantages of Material Management Conclusion AGENDA SN Panigrahi
- 6. 6 Supply Chain Basics Supply Chain Management (SCM) can be defined as management of the supply chain as an integrated process of acquisition and management of flow of supply of from point of origin to point of consumption and delivering further value added output to the next level point of consumption (like from supplier to manufacturer to wholesaler to retailer and to final consumer) by balancing supply and demand with optimal management of resources with the objective of establishing relationships for maximising value for mutual benefits on economically, socially and environmentally sustainable basis. S.N.Panigrahi SN Panigrahi
- 7. 7 Supply Chain Management of Flow S.N.Panigrahi SN Panigrahi
- 8. 8 The prime objective of SCM is to meet the customer demand most efficiently in terms of cost, quality and delivery (making available required quantity at right time and at right place). This management function broadly involves : Demand Planning - A critical success factor to supply chain management is accurate demand forecasting and planning to develop a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers. Supply Planning - Source – choosing right vendors and sourcing required input products / services involving control of inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authorizing supplier payments; and Make - manufacturing and assembling – inputs or raw materials into finished goods- production scheduling / work load balancing; aims at optimal supply network and production efficiency Demand Fulfilment - Delivery - coordinating receipt of orders - distribution planning - scheduling delivery – logistic planning - delivering products or services to consumers. - involves warehousing, delivering, invoicing and payment collection; and Return - receiving defective and excess products back from their customers and supporting customers who have problems with delivered products; aims at distribution efficiency and better customer value BALANCING SUPPLY & DEMAND S.N.Panigrahi SN Panigrahi
- 9. Material includes all the things from raw material to semi-finished and finished goods. MM is Concerned Preliminary with Transformation Process MM covers various aspects of input process, like it deals with Raw- Materials, Packing Materials, Consumables, Procurement of Machines, other Tools and Necessary Spares for the Maintenance. It has great significance as it has direct relation with the efficiency of a system. Generally every manufacturing unit has 50% to 75% of sales turnover investment in materials. Which makes it critical part. SN Panigrahi
- 10. • It involves planning and programming for procuring of material and quality goods of desired quality and specification at reasonable price and at right time. • It involves being up-to-date with market information, stores and stick control, inspection and transportation of materials. SN Panigrahi
- 11. Expense made on Materials is invested in inventories, storage, transportation, insurance etc. Previously only Marketing and Manufacturing were considered as important activities of an enterprise. Material management has gained its importance due to costs involved and economizing the total activity. Material Management is basic function of business that adds directly to value of product. SN Panigrahi
- 12. 4 Basic Needs of Material Management To have Adequate Materials on hand when Needed To pay the lowest possible prices, consistent with quality & value To Minimize the Inventory Investment To Operate Efficiently SN Panigrahi
- 13. Definition It is concerned with Planning, Organizing and Controlling the Flow of Materials from Point of Origin to Point of distribution. OR Material management is a scientific technique, concerned with Planning, Organizing & Control of flow of Materials, from their initial purchase to destination. Material Management is a term used to connote “controlling the kind, amount, location, movement and timing of various commodities used in production by industrial enterprises.” Material Management is a basic function of the business that adds value directly to the product itself. Material management deals with controlling and regulating the flow of material in relation to changes in variables like demand, prices, availability, quality, delivery schedules etc. SN Panigrahi
- 14. The Right Quality Right Quantity of supplies At the Right Time At the Right Place For the Right Cost SN Panigrahi For the Right Source
- 15. • Lead Time • Visibility • Flexibility • Network • Flow Control • Frequency • Balancing Accumulation & Acquisition • Quality • Reliability • Continuity Continuity Optimization SuppliesTransfer SN Panigrahi
- 16. To gain Economy in Purchasing To Satisfy the Demand During Period of Replenishment To Carry Reserve Stock to Avoid Stock Out To Stabilize Fluctuations in Consumption To Provide Reasonable Level of Client Services Containing the Costs Instilling Efficiency in All Activities of Materials & Information Flow SN Panigrahi
- 17. • The responsibility of material management ends only when the correct finished product in proper condition and quality passes to the consumer. -Bethel • General Electric Company (G.E.C) of USA, pioneers in the field of material management listed the functions of Material Management under the following heads:- SN Panigrahi
- 18. 18 Material Planning Planning and Programming for Materials Purchased Material Sourcing Identifying & Selecting Right Vendors Inventory Control Stores and Stock Control Material In & Out Flow Receiving and Issue of Material Material Handling Transportation and Material Handling Budgeting Estimating Working Capital Requirement Waste Disposal Disposal of Scrap and Surplus Material. Value Engineering and Value Analysis Cost Reduction Inventory Optimization & Efficient Handling of Materials & Waste Minimization SN Panigrahi
- 19. Material Selection. Low Operating Costs. Receiving and Controlling Materials Issuance on Receipt to Concerned Consumer Identification of surplus stock and take measures to reduce it SN Panigrahi
- 20. 20 Primary Continuity of Supply Consistency in Quality Reduce overall Cost of Operation Increase Productivity Efficient use of Capital & Resources Profit Maximization & Wealth Maximization Acquisition @ Right Price Improve Inventory Turnover Lowering Inventory Investment & Holding Costs Reduce Wastages and Defects Secondary Forecasting & Demand Assessment Good Information System Good Supplier Relations Inter-departmental Harmony Product Improvement Review of Specifications & Standardization Enhance Better Working Conditions Ensure Safety Improve Reliability, Responsiveness Ensure Customer Satisfaction SN Panigrahi
- 21. 21 Purchasing Production Control Inventory and Stores Control Physical Distribution The Materials manager has 4 important duties. For which he appoints managers under him, viz SN Panigrahi
- 23. SN Panigrahi 23 Benefit of Integrated Materials Management Centralized Authority & Responsibility Well coordinated Efforts resulting in Better inventory planning Faster inventory turnover Assured Material availability Efficient coordination Better communication Better Buyer- Supplier relations Reduced materials handing costs. Smooth flow of materials Improved productivity Increased profitability
- 24. SN Panigrahi 24 A Better Inventory Turnover Reduced Stock Outs A Reduced Lead Time Reduced Paper Work Reduced Storage & Preservation Costs A Better Materials Planning A better result oriented communication, judicious inventory control & speedy solutions to materials problems Less Number of Safety Related Accidents
- 25. 25 Material Costs Procurement Costs Supply Planning Cost; Purchasing Cost; Supplier Quality Cost Inventory Costs Raw material / Input W/H Cost; Finished Goods W/H Cost Delivery (Supply to Customer) Cost Demand Planning Cost; Design & Engg. Cost; Making Cost; Demand Fulfillment Cost Logistic Costs Inbound Cost; Outbound Cost; Reverse Logistic Cost Processing Costs Order Processing Cost; Customer Servicing Cost; IT operating Cost Finance Cost Accounts Receivable Cost; Accounts Payable Cost; Financing Cost Misc. Cost Obsolescence Cost; Shrinkage Cost ; Opportunity Cost ; Disposal Cost Material Costs Note : Production & Operating Costs are not considered here SN Panigrahi
- 26. 26 • Volume of Purchases • Local Source of Materials • Fluctuations in Prices of Materials • Design and Engineering of Product • Design of Equipment • Pre-Inspection of Material • Specialized agency for purchasing SN Panigrahi
- 27. 27 Regular Supply is ensured, aiding for uninterrupted production process. Procurement and Transportation Costs can be Controlled and Checked. Efficient Stock and Stores Control Minimizes Waste Pre-inspection of RM Minimizes Chance of Rejection of Final Product Timely Supply to Customer and other Information is Ensured SN Panigrahi
- 28. 28 Best utilization of labor, capital and equipment is ensured Congestion in stores and confusion can be avoided, resulting in better services Manufacturing Cycle is Reduced to min Slight Changes in Material costs, Changes the Profit Statement of the co. Shortages can be Eliminated SN Panigrahi
- 29. Basic principles of material management 1. Effective management & supervision. It depends on managerial functions of • Planning • Organizing • Staffing • Directing • Controlling • Reporting • Budgeting 2. Sound purchasing methods 3.Skillful & hard poised negotiations 4.Effective purchase system 5.Should be simple 6.Must not increase other costs 7.Simple inventory control programme SN Panigrahi
- 30. Elements of material management 1. Demand Estimation 2. Identify the Needed Items 3. Calculate from the trends in Consumption during last 1 / 2 years. 4. Review with Resource Constraints SN Panigrahi
- 31. Points to remember while purchasing •Proper specification •Invite quotations from reputed firms •Comparison of offers based on basic price, freight الشحن & insurance, taxes •Quantity & payment discounts •Payment terms •Delivery period, guarantee •Vendor reputation (reliability, technical capabilities, Convenience, Availability, after-sales service, sales assistance) •Short listing for better negotiation terms •Seek order acknowledgement 31
- 32. Review selection Determine Needed Quantities Reconcile Needs & Funds Choose Procurement Method Select Suppliers Specify Contract Terms Monitor Order Status Receipt & Inspection Procurement cycle
- 34. Objectives of procurement system •Acquire needed supplies as inexpensively as possible •Obtain high quality supplies •Assure prompt & dependable delivery •Distribute the procurement workload to avoid period of idleness & overwork •Optimize inventory management through scientific procurement procedures
- 35. 35 Identify Needs Write Specifications Raise Purch. Requisition Selection of a Procurement Method Verification & Study By Purch. Dept. Cost / Budget Check & Scrutiny PR Approval Vendors Selection & Bid Notification / RFQ Bid Receipt and Opening Award Contract/POProposal Approval Evaluation Review By Contracts Committee Negotiations CONTRACT ------- --------- ------- ------ ----- -- --- ------ ------- ------ ------- - -------- ------ ABCD ------ ------ ---- ---- ----------- -------- ------- ----- ------- ----- ------- -12345 --- ----- --- ---- ----- ------- ----- ---- ------ ----- ------ ------ ------ XYZ SIGNATURE VENDOR Material DeliveryMaterial Receipt & InspectionPayment PROCUREMENT PROCESS CYCLE S.N.Panigrahi Review By Contracts Committee
- 36. 36 ANALYSE SPEND & IDENTIFY COST DRIVERS IMPLEMENT- MEASURE- FIND SHORT FALLS IMPROVEMENT PLANS & ITERATE DEVELOPE PROCUREMENT STRATEGY IDENIFY COST SAVING OPPORTUNITIES AFTER ASSESSING RISK-BENEFIT CREATE SOURCING TEAMS & IMPART TRAINING ADOPT RIGHT SYSTEMS & TECHNOLOGY Based on outcomes after Assessing Supply Mkt., Assessing Demand & Internal Processes PROCUREMENT STRATEGY - PROCESS S.N.Panigrahi
- 37. 37 Procurement Types Involves materials purchased for use in the manufacturing or distribution supply chain that are "directly" related to the production of finished goods. Ex : Raw Materials, Consumables Involves any commodity or service that a company buys that does not result directly in finished goods. (Operations Resource Management) (Maintenance, Repair and Operations) S.N.Panigrahi Products and services used to facilitate daily business routines such as office supplies, stationaries, travel, furniture, computers consumables and printers etc. these are high volume – low value items. Overhaul or maintenance items : Spare Parts, Electrical, Mechanical & Electronic parts Lubricants, Fuels & Gases, Safety and Healthcare items Capital Goods : Equipment's, Machinery, Labour Contracts, Security Contracts, Erection & Commissioning Contracts, AMC Contracts
- 38. 38 DIRECT PROCUREMENT INDIRECT PROCUREMENT Raw Materials Direct Prod. Items MRO ORM CAPITAL GOODS SERVICES Very High Low to Moderate Low to Moderate Low Low to ModerateVolume / Qty Very High Moderate Low High ModerateValue Low Moderate to High Moderate Low Moderate Frequency of Ordering Operational / Strategic Tactical Operational / Tactical Strategic Operational / TacticalNature Critical Routine to Critical Generally Low Critical Routine to Critical Delivery Criticality / Risk High Moderate Low High Moderate to HighImpact on P/L Few Few to Large Large Few Few to LargeSupply Base (No.) High Moderate to High Low High Moderate to HighQuality Impact Highly Essential Essential Not so Essential Essential ----------------Controlled Inventory Raw Materials, Consumables Spare Parts, Electrical, Mechanical & Electronic parts Lubricants, Fuels & Gases, Safety and Healthcare, Office supplies, stationaries, travel, furniture, computers consumables and printers etc. Equipment, Machinery, Capex Labour Contracts, Security Contracts, Erection & Commissioning Contracts, AMC Contracts Examples FEATURES PROCUREMENT TYPES
- 39. SN Panigrahi 39 AGREEMENT (meeting of the minds ) + = ENFORCEABLE BY LAW COMPETENT TO CONCTRACT FREE CONSENT LAWFUL OBJECT LAWFUL CONSIDERATION NOT VOID PROMISOR / OFFEROR / SELLER PROMISEE / OFFEREE / BUYER PROMISE / OFFER ACCEPTANCE LEGAL OBLIGATIONS L E G A L R E L A TI O N S H IP L E G A L R E L A TI O N S H IP CONTRACT
- 40. 40 NEGOTIATION Preparation Market Study Buyer-Seller Dependency Leverage Buying Potential Assess Opp. Closure / Conclusion Develop Strategy Establish Relationships Negotiate Ethically Protect Financial Exposure & Risk Meeting For Negotiation S.N.Panigrahi EIGHT STEPS FOR NEGOTIATING A BETTER CONTRACT
- 41. 41 S.N.Panigrahi
- 42. Rate contract Firms are asked to supply stores at specified Rates during the period covered by the Contract Spot purchase It is done by a committee, which includes an officer from stores, accounts & purchasing departments Risk purchase If supplier fails, the item is purchased from other agencies & the difference in cost is recovered from the first supplier
- 43. Points to remember while purchasing •Proper specification •Invite quotations from reputed firms •Comparison of offers based on basic price, freight & insurance, taxes and levies •Quantity & payment discounts •Payment terms •Delivery period, guarantee •Vendor reputation (reliability, technical capabilities, Convenience, Availability, after-sales service, sales assistance) •Short listing for better negotiation terms •Seek order acknowledgement
- 44. 44 Cost of capital Storage, Handling & Maintenance Obsolescence, Damage and Deterioration Pilferage/Shrinkage Insurance, Taxes, Depreciation Management costs –Ordering, IT Operation, Processing, Staffing Opportunity Cost Inventory Cost S.N.Panigrahi Inventory Costs Reasons for Inventory To create a buffer against uncertainties in supply & demand To take advantage of lower purchasing and transportation cost associated with high volume To take advantage of economies of scale associated with manufacturing products in batches To build up seasonal demand for promotional sales To accommodate product flowing from one location to another (work in process or in transit) To exploit speculative opportunities for buying and selling commodities and other products
- 45. 45 Inventory Cost Reduction (Inventory Reduction is Recognized as a Cost Reduction) Improve Accuracy of Forecasts By Developing Better Forecasting Methods; Promoting Better Communication Lower Lead Times Negotiate to Reduce Supplier Lead Times; Develop Local Vendors; Select Right Mode of Transport Reduce Variety & Standardize Reduce Number of Items Carried / Variety; Substitute for Standard Parts; Consolidate Common Part Numbers Consolidate Inventory Maintain Common Inventory of Different Units / Group companies; Consolidate SKUs by their dimensions or minor variances of specifications or by brand Improve Supplier's Quality & Time Delivery Performance Reward Supplier’s Superior Performance for Quality & On-Time Delivery. It will Reduce Cost of Rejections, Rework, Warranty, Inspection and Excessive Expediting; Lead Time & Inventory Review EOQ Review EOQ with revised Lead Time; Reduce Qty Lifting & Increase Frequency; Re- negotiate Supplier Min. Order Qty (MOQ) Improve Consumption Turn Over Right Scheduling of Requirement; Supplier Managed Inventory Vendor Managed Inventory (VMI); Point of Sale (POS); Consignment Stocking; Distributor Managed Inventory Involve All Concerned Involve Suppliers, Buyer, Engineering, Manufacturing / User, Finance Reduce Surplus and Obsolete Inventory Use it elsewhere; Return it to the Supplier; Sell to other companies ; Sell at a Discounted Price or Scrap it Inventory Cost Reduction S.N.Panigrahi
- 46. 46 Main Fields of Logistics : Procurement logistics Production logistics Distribution logistics After-sales logistics Disposal logistics Reverse logistics Global logistics Domestics logistics Main Areas of Logistic Costs : Logistic Planning, Selection & Processing Cost Costs of Physical Flow of Material (Leasing, Depreciation, Insurance, Cost of Fuel / Energy, Labour costs, Costs of transport services, Other costs of flow) Costs of Inventory (Cost of inventory leasing, Costs of inventory workers, Costs of Stock Losses, Other costs (insurance)) Logistic Fields & Costs Cost Reduction Opportunities : Logistic Planning : Schedule, Mode of Transport, Rates Consolidation : Consolidate Consignments if Possible S.N.Panigrahi
- 47. 47 Cost Transit Time Reliability Capability Accessibility Airways Seaways Railways Road Pipelines Traceability Conveyers Location Nature of Cargo Plan Logistics To Reduce Costs S.N.Panigrahi Volume
- 48. 12-48 The Role of the Stores & Understanding Stores Functions •A professionally managed Stores has a process and a space within, to receive the incoming materials (Receiving Bay), keep them for as long as they are not required for use (Custody) and then to move them out of stores for use (Issue). That is Main Responsibilities are : •Properly account for every item received in the stores •Preserve the material till its issue from stores and •Issue the material when demanded Incoming Receipts (Receiving Bay) Stocking (Safe Keeping) Issuing (Move Out of Stores) Inventory Management Stores Materials Handling Disposal of Unwanted Goods House Keeping Records Keeping
- 49. 12-49 Materials Receipt and Accounting Different Modes of Receipt By Road / Rail / Sea / Air / Courier / Pipeline Verification of Consignments Verification for any Pilferage / Shortage / Damage Receipt, Accounting & Documentation Matching the Receipts against Documents & Accounting; Preparing MRN / GRN / SRV – Verifying Authenticity of Tax Documents Direct Delivery to User or Central Storage As per Requirement as per Contractual Agreement Lead Time From the Point of Receipt to Accounting (Preparation of GRN / SRV) Only after Proper Accounting Issues & Payments are made.
- 50. 12-50 Material Handling in Stores Loading / Unloading Receipt Un-Loading & Issues Loading; Internal Movement Material Handling Equipment's Articular Trailers, Revolving Cranes, Fowlers, Fork Lifts Of Various Carrying / Lifting Capacities Issue Notes & Gate Pass Material issued from Stores to the actual users against Material Issue Note Materials sent Out Side the Factory / Warehouse against Gate Pass
- 51. 12-51 Forms of Inventory Input Form Raw Materials; Consumables; Components; Packing Materials Semi-Finished Form Work in Process Finished Form Ready to Deliver to Customer In Transit Items being Transported Capital Goods Tools and Equipment
- 53. 12-53 – Economies of Scale Encourage production, purchase, and transportation economies Allows for long production runs Takes advantage of Price-Quantity discounts Allows for transport economies from larger shipment sizes – Uncertainty in Supply and Demand Protect against uncertainties in demand and lead times Provides a measure of safety to keep operations running when demand levels and lead times cannot be known for sure Supply Disruptions Seasonal or Cyclical Demand – Lead Time, Capacity Limitations Why do we Hold Inventory?
- 54. 12-54 Why do we Hold Inventory? Improve customer service Provides immediacy in product availability Inventory must be sufficient to provide high-quality Customer Service – Availability of Goods when Customers Wanted. Act as a hedge against price changes Allows purchasing to take place under most favorable price terms Act as a hedge against contingencies Buffers against such events as strikes, fires, and disruptions in supply Bullwhip Effect Demand information is distorted as it moves away from the end- use customer Higher Safety Stock inventories are stored to compensate Buffers against such events as strikes, fires, and disruptions in supply
- 55. Inventory-55 Reasons for Inventories Avoids Work Stoppages - Inventory provides independence between stages and avoids work stoppages Independence from Vendor’s Maneuverability Inventory provides Independence from Vendor’s Maneuverability Provide Flexibility in Production Plan Take the advantage of Batches and Longer Production Run Provide flexibility to allow changes in production plans in view of changes in demands etc
- 56. 12-56 First in first out (FIFO) Defined: Following this method, the first lot of stock that comes into your warehouse should be the first that goes out. Applied: While it is the most widely used accounting technique in periodic inventory management today, FIFO may fail to offer a full picture of inventory value if inflation and price increases are not closely analyzed. Thus, FIFO may inflate or deflate the actual value of future inventory. Last in first out (LIFO) Defined: Conversely, this method means that the most recent stock to come into your warehouse should be sent out first. Applied: The LIFO method could reduce a company’s tax responsibility in times of growing inflation – but it has been heavily regulated under the International Financial Reporting Standards. Average cost or weighted cost (AVCO) Defined: The AVCO (average cost) method will take the total cost of goods still available for sale and divide it by the total sum of product from the beginning inventory and purchases. Applied: With the AVCO method, cost flow is determined as a weighted average of all total unit costs. Valuation of inventories FIFO – LIFO - AVCO
- 57. 12-57 Inflow & Out Flow of Stock
- 59. ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A - very important B - mod. important C - least important Figure 11.1 Annual $ value of items A B C High Low Few Many Number of Items12-59
- 60. ABC Classification • 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 13-60
- 61. ABC Classification 13-61 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE
- 62. ABC Classification 13-62 Example 10.1 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 2 14,000 16.4 4.0 15.0 1 5,400 6.3 9.0 24.0 4 4,800 5.6 6.0 30.0 3 3,900 4.6 10.0 40.0 6 3,600 4.2 18.0 58.0 5 3,000 3.5 13.0 71.0 10 2,400 2.8 12.0 83.0 7 1,700 2.0 17.0 100.0 TOTAL % OF TOTAL % OF TOTAL PART VALUE VALUE QUANTITY % CUMMULATIVE A B C $85,400
- 63. ABC Classification 13-63 Example 10.1 % OF TOTAL % OF TOTAL CLASS ITEMS VALUE QUANTITY A 9, 8, 2 71.0 15.0 B 1, 4, 3 16.5 25.0 C 6, 5, 10, 7 12.5 60.0
- 64. Cycle Counting • A physical count of items in inventory • Cycle counting management • How much accuracy is needed? • When should cycle counting be performed? • Who should do it? 12-64
- 65. What is the main insight from EOQ? There is a tradeoff between holding costs and ordering costs Order Quantity (Q*) Total cost Holding costs Ordering costs The Total-Cost Curve is U-Shaped TC Q H D Q S 2 AnnualCost 12-65
- 66. Economic Order Quantity - EOQ Q* = 2SD H Example: Assume a car dealer that faces demand for 5,000 cars per year, and that it costs $15,000 to have the cars shipped to the dealership. Holding cost is estimated at $500 per car per year. How many times should the dealer order, and what should be the order size? 548 500 )000,5)(000,15(2* Q • Demand : D units/year • Ordering cost = S • Annual holding cost = H per unit • Quantity Ordered (order in batches) = Q 12-66
- 67. Inventory-67 Pull vs. Push Inventory Philosophies Plant Warehouse #1 Warehouse #2 Warehouse #3 A 1 A 2 A 3 A = Allocation quantity to each warehouse Q = Requested replenishment quantity by each warehouse Q 1 Q 2 Q 3 Demand forecast Demand forecast Demand forecast PULL - Replenish inventory with order sizes based on specific needs of each warehouse PUSH - Allocate supply to each warehouse based on the forecast for each warehouse
- 68. Inventory-68 Inventory Management Objectives • Good inventory management is a careful balancing act between stock availability and the cost of holding inventory. • Service objectives • Setting stocking levels so that there is only a specified probability of running out of stock • Cost objectives • Balancing conflicting costs to find the most economical replenishment quantities and timing Customer Service , i.e., Stock Availability Inventory Holding costs
- 69. Inventory-69 Just-in-time Philosophy • A philosophy of scheduling where the entire supply channel is synchronized to respond, in as short a time as possible, to the requirements of operations • Close relationship with a few suppliers and transport carriers • Information is shared between buyers and suppliers • Frequent production/purchase and transport of goods in small quantities • Minimum inventory levels • Uncertainties are to be eliminated wherever possible throughout the supply channel • Videos: https://www.youtube.com/watch?v=H8IkSZaNpRc https://www.youtube.com/watch?v=-2huDogfXS8
- 70. Inventory-70 MRP Scheduling • The mechanics of lot-for-lot scheduling given certain requirements and lead times • Purchase orders are matched on a one-for-one basis with requirements. • Determining lot sizes • Trading purchase price for inventory carrying cost • Vendors can set order minimum quantities to avoid the high cost of handling small orders. • This will usually force some inventory into the system. • The economically best order quantities can be set by balancing the cost of processing an order with the cost of carrying the inventory associated with ordering more than what is immediately needed. • Handling uncertainties in the master schedule • Minimum inventory levels • Part-period cost balancing • Handling lead time uncertainties
- 71. Inventory-71 KANBAN• Toyota’s method of scheduling using the order point inventory control procedure, but with very low setup costs and very short lead-times • Models are repeated frequently in the master schedule. • A typical master schedule for economies of scale might look like AAAAAABBBBBBAAAAAABBBBBB • but a KANBAN schedule would approach ABABABABABABABABABABABAB • Lead-times are predictable because they are short and because suppliers are located near the site of operations • Order quantities are small because setup or procurement costs are kept low • Few vendors are used with high expectations of vendors and high level of cooperation with them • Classic reorder point inventory control is used to determine reorder quantities and timing of purchases • Vedio : • https://www.youtube.com/watch?v=5izyN66PTxs
- 73. 12-73 Inventory Performance Measurement If the turnover is low, the company either has too much stock or too few sales.
- 74. 12-74 Gross Margin Return on Investment (GMROI) = Gross Margin / Average Inventory Cost Inventory Performance Measurement Shrinkage = Ending Inventory Value – Physically Counted Inventory Value Shrinkage % = Shrinkage / Sales x 100 Sell-through Rate = Number of Units Sold / Beginning Inventory x 100
- 75. 12-75 Inventory Performance Measurement Holding Costs Service Level Lead Time Rate of Return Inventory Accuracy Perfect Order Rate
- 76. 76 Supplier Performance Delivery in-full Ave 93% Delivery on-time Ave 95% X - Less Rejects Ave 1% = Supplier DIFOT What’s yours? What is the flow on effect to you? More inventory? Low service delivered to your customers? Unnecessary costs? DIFOT : Delivery In-Full and On-Time OTIF : On Time In Full S.N.Panigrahi
- 77. Storage • Store must be of adequate space • Materials must be stored in an appropriate place • in a correct way • Group wise & alphabetical arrangement helps in • identification & retrieval • First-in, first-out principle to be followed • Monitor expiry date • Follow two bin or double shelf system, to avoid • Stock outs • Reserve bin should contain stock that will cover • lead time and a small safety stock Issue & use Can be centralized or decentralized
- 78. Inventory control It means stocking adequate number and kind of stores, so that the materials are available whenever required and wherever required. Scientific inventory control results in optimal balance
- 79. Functions of inventory control •To provide maximum supply service, consistent with maximum efficiency & optimum investment. •To provide cushion between forecasted & actual demand for a material
- 80. Economic order of quantity EOQ = Average Monthly Consumption X Lead Time [in months] + Buffer Stock – Stock on hand CARRYING COST PURCHASING COST ECONOMIC ORDER OF QUANTITY(EOQ)
- 81. •Re-order level: stock level at which fresh order is placed. •Average consumption per day x lead time + buffer stock •Lead time: Duration time between placing an order & receipt of material •Ideal – 2 to 6 weeks.
- 82. ABC ANALYSIS (ABC = Always Better Control) This is based on cost criteria. It helps to exercise selective control when confronted with large number of items it rationalizes the number of orders, number of items & reduce the inventory. About 10 % of materials consume 70 % of resources About 20 % of materials consume 20 % of resources About 70 % of materials consume 10 % of resources
- 83. ‘A’ ITEMS Small in number, but consume large amount of resources Must have: •Tight control •Rigid estimate of requirements •Strict & closer watch •Low safety stocks •Managed by top management
- 84. ‘C’ ITEMS Larger in number, but consume lesser amount of resources Must have: •Ordinary control measures •Purchase based on usage estimates •High safety stocks ABC analysis does not stress on items those are less costly but may be vital
- 85. 20000050020 19950050019 19900050018 19850050017 19800050016 19750050015 19700050014 19650050013 196000150012 194500150011 193000175010 19125027509 18850040008 18450045007 18000050006 17500075005 16750075004 160000200003 140000500002 90000900001 CUMMULATIVECUMMULATIVE COSTCOST [Rs.] ANNUAL COSTANNUAL COST [Rs.] ITEMITEM COST %COST %ITEM %ITEM % 70 %70 % 20 %20 % 10 %10 % 10 %10 % 20 %20 % 70 %70 % ABC A N A L Y S I S WORK SHEET
- 86. ‘B’ ITEM Intermediate Must have: •Moderate control •Purchase based on rigid requirements •Reasonably strict watch & control •Moderate safety stocks •Managed by middle level management
- 87. VED ANALYSIS • Based on critical value & shortage cost of an item –It is a subjective analysis. •Items are classified into: Vital: •Shortage cannot be tolerated. Essential: •Shortage can be tolerated for a short period. Desirable: Shortage will not adversely affect, but may be using more resources. These must be strictly Scrutinized V E D ITEM COST A AV AE AD CATEGORY 1 10 70% B BV BE BD CATEGORY 2 20 20% C CV CE CD CATEGORY 3 70 10% CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL CATEGORY 2 - MODERATE CONTROL. CATEGORY 3 - NO NEED FOR CONTROL
- 88. SDE ANALYIS Based on availability Scarce Managed by top level management Maintain big safety stocks Difficult Maintain sufficient safety stocks Easily available Minimum safety stocks FSN ANALYSIS Based on utilization. Fast moving. Slow moving. Non-moving. Non-moving items must be periodically reviewed to prevent expiry & obsolescence HML ANALYSIS Based on cost per unit Highest Medium Low This is used to keep control over consumption at departmental level for deciding the frequency of physical verification.
- 89. PROCURMENT OF EQUIPMENT Points to be noted before purchase of an equipment: •Latest technology •Availability of maintenance & repair facility, with minimum down time •Post warranty repair at reasonable cost •Upgradeability •Reputed manufacturer •Availability of consumables •Low operating costs •Installation •Proper installation as per guidelines
- 90. HISTORY SHEET OF EQUIPMENT: History sheet Name of equipment Code number Date of purchase Name of supplier Name of manufacturer Date of installation Place of installation Date of commissioning Environmental control Spare parts inventory Techn. Manual / circuit diagrams / literatures After sales arrangement Guarantee period Warranty period Life of equipment Down time / up time Cost of maintenance Unserviceable date Date of condemnation Date of replacement
- 91. Maintenance sheet: Annual maintenance contract [AMC] Starting date Expiry date Service / repair description Materials / spares used Cost of repairs In-house Outside agency
- 92. EQUIPMENT MAINTENANCE & CONDEMNATION Maintenance & repairs: Preventive maintenance Master maintenance plan Repair of equipment
- 93. PREVENTIVE MAINTENANCE •Purchase with warranty & spares. •Safeguard the electronic equipments with: (as per guidelines) •Voltage stabilizer, UPS •Automatic switch over generator •Requirement of electricity, water, space, atmospheric conditions, etc. Must be taken into consideration •Well equipped maintenance cell must be available •All equipment must be operated as per instructions with trained staff •Monitoring annual maintenance contracts. (AMC) •Maintenance cell •Communications between maintenance cell & suppliers of the equipment. •Follow-up of maintenance & repair services •Repair of equipment •Outside agencies •In-house facility
- 94. CONDEMNATION & DISPOSAL Criteria for condemnation: The equipment has become: 1. Non-functional & beyond economical repair 2. Non-functional & obsolete 3. Functional, but obsolete 4. Functional, but hazardous 5. Functional, but no longer required
- 95. PROCEDURE FOR CONDEMNATION 1. Verify records. 2. History sheet of equipment 3. Log book of maintenance & repairs 4. Performance record of equipment 5. Put up in proper form & to the proper authority
- 96. DISPOSAL 1. Circulate to other units, where it is needed 2. Return to the vendor, if willing to accept 3. Sell to agencies, scrap dealers, etc 4. Auction 5. Local destruction
- 97. SN Panigrahi 97 Details can be Viewed on SlideShow @ Below Link https://www.slideshare.net/SNPanigrahiPMP/managing- project-financial-auditing-by-sn-panigrahi-146779472
- 99. 99 SN Panigrahi