1. introduction to materials management. 2. Linkage of Production System with Inventory. 13. Evaluating Materials Management Performance & MIS

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1 Contents Pages 1. introduction to materials management 2. Linkage of Production System with Inventory 3. Materials Control Through JIT System 4. Material Requirement Planning (MRP) 5. Inventory Control 6. Work-in-Process Inventory 7. Spare parts Management 8. Purchasing 9. Materials Handlings 10. Store-Keeping 11. Stores Accounting 12. Materials Cost Reduction Techniques 13. Evaluating Materials Management Performance & MIS 14. Computerized Materials Management System 15. Studies and Business Games

2 Introduction to Materials Management Meaning It deals with purchasing and storage of materials so as to provide optimum customer service consistent with efficient operation at minimum inventory investment. Inventory in an organization is analogous to water level in a bath tub. The level increases if rate of outflow is less than inflow. A perfect synchronization of rate of outflow with rate of inflow through a suitable control mechanism will ensure a minimum water level just enough to meet requirements. 2. Relationship with Productivity Productivity in manufacturing sector in India has declined at a rapid rate during 1960 to The rate of declined in engineering industries has been much higher than other industry, more so in the case of non-electrical machinery and transport equipment where the rate of decline is as high as 1.6% per annum. This is despite the fact that labour productivity in these industries has been growing at an impressive rate of 3-4% per annum. Among other measures in arresting this decline, better inventory management and reduction in cash holdings are verysignificant.

3 2 Materials Management Productivity = Values of Goods & Services produced Inputs(Labour + materials + Capital + Energy+ ) As nearly 70% of the total cost of production in manufacturing organizations is constituted by Materials Cost, a small % reduction in this cost is going to increase productivity substantially than effecting same % reduction in any other input factors like labour, energy etc. Moreover, better availability of materials will increase production and sales values. Inventory Syndrome A supplier producing 4 units/week & meeting requirement of 4 customers with a consumption of 1 unit/week, delivered 4 units to each after 4 weeks. Each unit will have average inventory of 2 units Customer A puts up a false demand of 1 additional unit as safety stock so as to be more safe than other units. Since the total demand in 4 weeks is now 17 against production capacity of 16, the supplier 'is forced to increase lead time from 4 weeks to 5 weeks. Immediately orders from other 3 customers will also be increased from 4 to 5 units making a total demand to 20 units. Each customer will then have an average inventory of 3 units With the real consumption of 1 unit/week only. Customer 'A' then to be ahead of others will place an order of 6 units making a total demand of 21 units. The supplier will therefore increase the lead time to 6 weeks forcing other three customers also to place orders for 6 units. Total demand will be 24 units. Each customer will have to keep an average inventory of 4 units, with the real consumption of 2 1 unit/week as earlier. And so on--this process continues. The inventories go on increasing without any real use. If the system of constant demand of 4 units/week would have continued, the balance of demand and supply would not have disturbed resulting into smooth functioning with a level of 2 units of average inventory. Fictitious demand, long lead times and piled-up inventories are the result of such syndrome. Scope A survey of the 161 Public Sector manufacturing units carried out in India during 1985 revealed the following:

4 Introduction to Materials Management 3 Total Investment = Crores Annual Output = Crores Average Inventory = Crores (Stores only) This means the inventory maintained in the form of stores inventory is approximately 3 months stock. In addition to the inventory lying in stores, a large work-in-process (WIP) inventory is also observed in an industry. It is quite normal practice to observe heaps of stock at each work station. Further, there are temporary stores and inspection points within the shops. Inventories in the form of finished goods (FG) are also not a small figure. Due to seasonal demand, incorrect forecast, improper co-ordination between Marketing and Production Planning, uncertain power supply, production leveling etc., some FG inventory may be necessary. FG inventory in various organizations however vary from few days to over 6 months, depending upon the nature of product. Adding up inventory of Raw Materials, Maintenance Spares, Operating Supplies, WIP & FG, it is estimated that a medium size industry keeps 4-6 months stocks. Most of the companies in Japan work on zero inventory or 2-3 days stocks. Agreed that the environment and work culture in India is such that the Japanese Standards of inventory cannot be met, however the level can certainly be brought down to less than a 1 month with little of planning and effort. This means that thousands of corers of rupees blocked in the form of inventories can be released for country's developmental projects. Importance of MM The pie diagram (Fig.1.2) shows that 64% of sale rupee are spent on cost of materials, 16% on labour cost and 20% on overheads. This is as per the result of the survey of 29 major industries in India. In addition to the cost of materials, the inventory carrying cost should also be taken into account when considering material cost. This comprises various elements e.g. interest charges, storage and handling costs, insurance, obsolescence etc. All this amounts to at least 20% of average inventory that means total material cost will be about 70% x As a big chunk of expenditure i.e. 70% is 2 towards materials cost, large savings will result if MM tools and techniques are used to cut down this cost-than whatever attempts are made to save on other items of expenditure like wages and salaries and overheads.

5 4 Materials Management It is true that most of the MM techniques are very simple to apply as compared to techniques of reducing wages and overheads. Fig. 1.2 Causes of Higher Inventory at Various Stages in an Organization Storage Place (i) Central Stores Causes * Bulk Purchases to avail discounts. * Seasonal availability of materials. * Purchases during periods of low market prices. * Full Wagon load to economies on freight. * Full Lorry load to economies on freight. * In anticipation of price rise at a rate higher than bank interest. * Scarce commodity (Not always available). * Long lead times. * Wide variation in lead time. * Quota item (Quantity and time of delivery not within control). * High stock-out cost. * Reduced No. of orders or large order quantities

6 Introduction to Materials Management 5 * Availability of Safe Storage facilities. * Long term contract with ancillary units/suppliers w.r.t. quantity and time of delivery. * Helping suppliers by making purchases in quantities more than actual requirement. (ii) Sub-Stores * Avoid frequent issues to eliminate 'Q' formation at central stores. * Avoid frequent handling in small unit loads between central store & sub-stores. * Spares, consumables and tools Exclusively purchased for departmental use. * Extra guard against a particular item feared to be out of stock at the central store. * Safety stock to meet contengency in case of rejections, higher rate of production, overtime work. * Drawal of materials for IInd & I1Ird shift if the central store remains open during 1st shift only. (iii) Semi-Finished Stores * Waiting for the specified unit load quantity to move to the next section/department. * Waiting for other components, subassemblies, bought-out item. * Waiting for clearance by Inspection Staff. (iv) Work Stations * Re-work required before transit to next section. * Waiting after the operation for transit to next station. * Operator absent/slow/late. * Machine breakdown. * Machine setting. * Solving Quality problems on the machine or re-work required.

7 6 Materials management (v) F.G. Stores * Bottle-neck operation * Waiting for customer orders. * Waiting for customer clearance visa-vis payments * Production leveling for better capacity utilization to meet seasonal demand. * Cancellation of customer orders. * Stop dispatch due to anticipated price rise.. * Waiting for wagon/lorry/container load. * Waiting for customs clearance wherever required. * Waiting for quality mark/inspection. * Seasonal demand. * Lack of co-ordination between Marketing & PPC deptts. (vi) Scrap, Obsolete Items & Disputed * Errors in sales forecasting. * Waiting for good remuneration * Normal delay in correspondence in settling disputes. Stores * Long procedure in obtaining approval for disposals. * Waiting for accumulation of sufficient quantity before disposals. Functions of Materials Management Major tasks involved in Materials Management are: 1. PLANNING Material Requirements as per master production schedules; identification, classification and codification of items that must be manufactured, sub-contracted or bought-out

8 Introduction to Materials Management 7 2. PURCHASING:- Selection of the sources of supply, placement of orders, follow up of orders, inspection before dispatch, transportation, payment of bills, vendor rating 3. INVENTORY CONTROL:- Determination of EOQ, Safety Stock, Lead Time; Implementation of Selective Controls & Replenishment Systems 4. STORE-KEEPING:- Receipt and Issue, Layout & Handling, Maintenance, Upkeep and Safety of Items, Scrap/Surplus disposal. 5. ACCOUNTING:- 6. MATERIAL ECONOMICS :- Valuation of stores, Physical Verification, Cost & Budgetary Control. Value Analysis, Variety Reduction, Standardization. Benefits of MM The health of an organization is measured by calculating its Rate of Return (ROR) on investment: Application of MM techniques result in reducing inventory thereby. reducing capital and hence increasing Capital Turnover Ratio. The techniques also help in reducing cost of materials through effective purchasing, value analysis, standardization, efficient material handling and reducing loss/obsolescence, thereby increasing profitability. Multiplication of both these factors creates a double effect on ROR and therefore it is true to say that the technique effects favorably from the top (increasing profit) and from the bottom (decreasing capital employed). It also lowers the Breakeven (BE) point as shown in figure 1.3

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10 3. 8 Materials Management Symptoms of Poor Inventory Management 1. Inability to meet delivery promises. 2. Continuously growing inventory while turnover is almost constant. 4. High rate of customer turnover or order cancellations due to nonattendance to their complaints. 5. Uneven production with frequent layoffs and re-hiring s. 2. Frequent need for uneconomical production runs to meet sales requirements. 6. Excessive machine downtime because of spares shortages. 7. Periodic lack of adequate storage space. 8. Consistently large inventory write-downs because of price declines, distress sales, disposal of non -moving stocks and so on. 8. Widely varying rates of inventory loss or turnover among branch warehouses or widely varying rates of turnover ratios among major inventory items indicating surplus stocks. 9. Consistently large write-downs at the time of physical stock taking. MM-Not an Easy Task High stocks cover up most of the management lapses. This is like driving a ship in a deep sea. The driver is not at all worried of any chance

11 Introduction to Materials Management 9 of ship hitting rocks in the sea and can even sleep while the ship sails smoothly. Managing with low inventory is like driving ship in shallow waters. The driver has to be very active all the time so as to steer ship to safe waters and avoid smash with rocks. As the water level goes down in the sea, more and more rocks appear calling for more and more vigilance of the driver. See Figure 1.4 below: MM being an important function should be under direct control of the chief executive. A typical organization set up of a medium size Engineering industry indicating position of Materials Manager in shown below It may be noted that various functions of materials management are being looked after by separate officers. Since most of the parts are supplied by ancillary units, a separate officer has been posted for this function and a separate officer for clearing & forwarding. There is no person for material planning since this functions/has been distributed between Inventory Control and purchase officers. Organization structure under Materials Manager normally varies from organization to organization depending upon the nature & volume of business.

12 2 Linkage of Production System with Inventory Materials Planning is closely related with the type of production system in a manufacturing organisation. The conventional systems and their linkage with inventory are briefly discussed in this chapter. Line Production System Line production system is the specialized manufacture of identical articles on which the equipment is fully engaged. Line production system normally associated with large quantities and with a high rate of demand. While in the job and lot type of manufacturing the production capacity normally exceeds the rate of demand, line production system is justified only when it" capacity can be sustained by the market. Here, full advantage should be taken of repetitive operations in the design of production auxiliary aids, such as special tools, fixtures, positioners, feeders and materials handling system, inspection devices, and weighing and packing equipment. Lot Production System Lot production System is the manufacture of a number of identical articles, either to meet a specific order or to satisfy continuous demand. When production of the lot is terminated, the plant and equipment are available for the production of similar or other products. As in job shop production, policies regarding tooling, fixtures, and other aids are dependent on the quantities involved. If the order is to be executed only once, there will be less justification for providing elaborate production aids than when the order is to be repeated. Job Shop Production System This is the manufacture of products to meet specific customer requirements of special orders. The quantity involved is small, usually "one off" or "several off," and is normally concerned with special project, models, prototypes, special machinery or equipment to perform specialized and specific tasks, components or assemblies to provide replacement for parts in existing machinery, etc.

13 Linkage of Production System with Inventory 11 Production & Inventory Control in line Production System Some Key Points (1) To keep production levels constant by adjusting product inventories. (2) To balance capacity among all processes. (3) To have buffering stock to avoid interference between processes. Kinds of line production system (1) Single-model assembly line:- An assembly line which is prepared in advance to produce an identical single item. (2) Mixed-model assembly line :- An assembly line which is prepared in advance to produce continuously identical multi items which can be assembled through almost same operations. Procedure for designing a single model assembly line (1) Determination of a cycle time. (2) Computation of a minimum number of processes. (3) Line balancing. (4) Determination of the length of the operations range of each process. (1) Cycle time:- A cycle time is an elapsed time between completed units coming off the end of an assembly line. C: cycle time A: available time per day Q: planned production quantity of the product (2) Minimum number of processes :- Nmin: minimum number of processes needed for the desired line output T : total operations time to assemble the product [] : minimum integer not less than the accurate figure in it

14 12 Materials Management (3) Line balancing:- Line balancing is to assign work elements to processes of the assembly so that performance times are equalized as much as possible. The elements must be assigned in compliance with the precedence relationship. Attempt should be made to minimize balancing delay. PRECEDENCE RELATIONSHIP Example: tj: Performance time for operations assigned to the jth process. N: The resultant number of processes needed after the assignment procedure in compliance with the precedence relationships. BD: Balancing delay. Procedure for designing a mixed-model assembly-line The procedure for designing a mixed-model assembly line involves the following step: (1) Determination of a cycle time

15 Linkage of production System with Inventory 13 (2) Computation of a minimum number of processes (3) Preparation of a diagram of integrated precedence relationships among work elements (4) Line balancing (5) Determination of the sequence schedule for introducing various products to the line It is important to note that a product might have a longer operation time than the predetermined cycle time. This is due to the fact that the line balancing on the mixed-model line is made under the condition that the operation time of each process, which was weighted by each quantity of mixed models, should not exceed the cycle time. This condition (constraint) will be described as the following formula: Qi: planned production quantity of the product Ai (i=1,2.) Tij: operation time of product Ai on the jth process C: cycle time As a result, if products with relatively longer operation times are successively introduced into the line, the products will cause a delay in completing the product and may cause line stoppage. Therefore, the assembly line model-mix sequence must be determined to minimize the risk of stopping the conveyor. (6) Determination of the length of the operations range of each process.. 'The length of the operations range of each process must be determined with some allowance for avoiding the work conjestion above mentioned.

16 14 Materials Management The systems of single model assembly and mixed model assembly are shown in Figure 2.1 below: 1(1) Singe-model assembly! inc (2) Mixed-model assembly line Fig. 2.1 Production & Inventory Control in Lot Production System Some key points (1) To determine proper lot sizes. (2, To determine proper quantities of work- in-process. (3) To make setup times as short as possible. The EOQ formula An economic ordering quantity formula is used which calculates the EOQ in one step. One form of this formula is: A : the annual usage, in Rs. S : the setup or ordering cost, in Rs. I : the inventory carrying cost, as a decimal fraction per Rs. of average inventory When lot sizes of each item in lot production system are determined according to the EOQ formula, it frequently happens that under the given capacity the resultant production schedules is infeasible for reasons of interference among the items. (8)

17 Linkage of Production System with Inventory 15 An example of production planning in a single process A basic cyclic schedule which both satisfies requirements during the planning period and minimizes quantities of work-in-process is presented in this section. TET (Total Elapsed Time) can be expressed as follows: Ri: requirements of item i during the planning period tsi: setup time of item i Tmi: machine processing time of item i N: the number of setups during the planning period To satisfy requirements during the planning period, the following inequality must hold true: Thus N (the upper limit of the number of setups) that satisfies requirements of all items during the planned period) can be derived as follows: []: maximum integer not greater than the accurate figure in it. Production & Inventory Control in Job Shop Production System Key points (1) To grasp accurate work loads to each process for a planning period. (2) To minimize due date tardiness. (3) To shorten shop time. Preparation of master schedule (1) Estimate shop time of each operation in each job (2) Arrange the operations in accordance with the routing. (3) Adjust starting time of each operation for the schedule of each operation not to mutually overlap in time in each process, pursuing minimization of the total elapsed time.

18 16 Materials Management Loading (1) Assignment of operations:- Operations are assigned to each process according to the master schedules. In overloaded planning periods, some of the operations must be shifted to "left" or "right" to level the workload. (2) Loading system :- There are two types of loading systems: 1) Backward loading:- Backward-loading is done by starting with the due date on which the order is required to be shipped and calculating the schedule backward to determine the proper period for each operation to be loaded to. 2) Forward loading :- Forward-loading starts with either the present time or the first open time at the first operation and compute the planning period for each operation to be loaded.

19 Materials Control Through JIT System Inventory requirements in an organisation are closely related to the production or consumption systems. JIT (Just-in-Time) is a production technique which helps in reducing inventory. The technique developed by Toyota Company in Japan has now spread all over the world. JIT system is an integrated manufacturing and supply system aimed at producing the highest quality and, at the same time, the lowest cost products through the elimination of waste. JIT integrates and controls the entire process. It specifies what should be stored, moved, operated on or inspected and precisely when it should be done. Just-in-Time production continuously strives to improve production processes and methods. It attempts to reduce, and ultimately to eliminate inventories because high inventories tend to cover up production problems. Various components of a JIT production system are given in figure 3.1. Components of JIT Production System FILL-UP: A PULL Type Ordering System Contrary to the conventional system where a central controller co-ordinates material flow from the first to the last stage of manufacturing, a pull system triggers action from the market demand. As soon as an order is received from the market, the dispatch section places an. order on final assembly section who in turn to sub-assembly section and so on to the stage of withdrawal of materials from stores for manufacturing. A chain reaction starts where-in each user is responsible to withdraw materials from the preceding operation eliminating the need for the central controller. A concept chart showing the conventional push type ordering system and the new pull type ordering system is given in Fig The production stages, storage stages, information and material flow channels have been shown explaining both the systems. The system is flexible and is adaptable to quick changes in demand. Only the required quantity of materials for use during a ~ay or a part thereof is drawn from the previous operation, thereby leaving almost nil inventory at work stations at the end of the day. The chances of accumulation of process inventory in a Push System are more since total output of a work station is pushed to next work station whether required or not.

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21 Materials Control Through JIT System 19

22 20 Materials Management Small Lot Production As the lot size increases, the work in process increases. To reduce inventories, the lot size should be reduced. In an ideal situation there should be one piece production and conveyance. The objective is to reduce production lead time through line balancing and redu6itg setting up time to almost zero. Use of flexible manufacturing system; standby tools, jigs and fixtures; automatic holding and conveying equipment; fastest possible speeds, feeds, depth of cut, CIM, automatic dimensional control etc., are some of the aspects which can be considered and adopted. A frame-work of reducing production lead time is shown in figure 3.3. Production Smoothing A system of forecasting demand for next 3 months, preparation of master production schedule and monthly production planning with a provision to adopt monthly demand changes. Simultaneously, a system of 10 day advance booking of firm orders from dealers, co-ordinating with sub-contractors, balancing shop production, preparation of daily despatch schedules and provision to incorporate last minute changes in daily demand should be well prepared. A frame work of production smoothing is shown in figure 3.4. KANBAN System A Kanban is a hand sized signboard contained in polypack that is the key control tool for JIT production. Kanbans are of two types i.e. "Production Instruction Kanban" and "Pick-Up or Withdrawal Kanban". Production Instruction Kanban indicates how many and what kind of parts have been passed from one place on the production line to the next place. It is a green signal to begin processing exactly the same type and number of items that were passed along. Pick-up Kanban is of two types. One called 'Interprocess Kanban' used within the plant for picking up needed parts from earlier process jobsite to the next process jobsite. Other type is 'supplier Kanban' used for picking up needed items from outside suppliers and is used the same way as inter-process pick up Kanbans. Steps involved in using the two Kanbans and their flows as well as the flow of physical units of product are explained in figure 3.5. It may be seen that the number of withdrawal Kanbans lying in post at "1" indicate the units consumed in subsequent process assembly line and therefore creation of the demand for equal number of units to be provided by preceding process machinery line. These Kanbans authorise picking up units from the machinery line store and are returned to assembly line along with physical units (see '3'). Depending upon the shortfall in the machinery line store, production ordering Kanbans

23 Materials Control Through JIT System 21 in desired quantity are placed in the post (see '2'), carried to production ordering Kanban post (see '5'). Production ordering Kanban authorise production in the machinery line and are sent to store again alongwith machined parts. Kanbans are the pre-printed forms containing product specifications, quantities and frequency of issue during a day. Kanbans are normally replaced every month depending upon next month production schedule. There is no need w give written instructions every time and hence it eliminates lot of paper work. At the same time it coordinates activities of whole plant as well as with the suppliers and establish a close circuit. Visual Control This is a method by which managers and supervisors can tell at a glance if production activities are proceeding normally or not. Light signals (Red & Yellow) are placed on various machines and storage points. If any problem arises, the operator switches on light signal.

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25 Materials Control Through JIT System 23 'Yellow' means there is a problem which operator himself is trying to solve. 'Red' means he needs help of the supervisor. Seeing red light, supervisor rush to the workplace. Similarly, a system of replenishment of stocks is used. A material calling ANDON for the later replenishment system is illustrated in Figure 3.6. When an empty box is found in the production shop, the worker pushes a switch (see' 1') thereby putting on main light in the- central store and a glow lamp (see '2') in the control pannel indicating the kind of material required-seeking the lamps, material carrier transports filled boxes to the line (see '5') and submits Supplier Kanban (detached from material box) to the Post Office of material Kanbans (see '6'). During the evening, all supplier Kanbans are classified supplier wise and handed over to respective truck drivers (see '7;) along with empty boxes. The drivers draw the materials from supplier as per the number of Kanbans and deliver to the factory during night (see

26 24 Materials Management '8'). The materials are therefore replenished to the central stores every day morning before production starts. From the system it may be observed that inventory is kept only for 1-2 days stocks, with almost no paper work, no noice and chaos and no congestion. The results of the introduction of JIT systems in Japan as per the survey conducted in 1986 are summarised below:

27 Material Requirement Planning (MRP) 4 Definition It is a management planning and control technique. Its initial processing function is to work backward from planned quantities and completion dates for end items on a master production schedule to determine what and when individual parts should be ordered. While any company that wants to do a better job of controlling material priorities and capacity can employ MRP, companies that manufacture complex assemblies are ideal for MRP. Thus while MRP can be effective in pharmaceutical, food, textile and chemical companies which are not 'assembly' operations, the technique can be extremely powerful in automotive, electronic and other assembly oriented companies. Item Forecasts Item forecasts are needed for determining order points, material plans, order quantities and schedules. They are best made using simple statistical techniques based on their own demand history. The technique called "exponential smoothing" an application of the "weighted average" concept provides a routine method for updating forecasts regularly as shown in table below: Weight First Week Weight Old forecast = 100 x 0.5 = 50 x 0.9 = 90 Sales = 70 x 0.5 = 35 x 0.1 = 7 New forecast = Second Week Old forecast 97 x 0.9 = 87 Sales 105 x 0.1 = 11 New forecast 98 General formula New forecast = a x Sales + (1-a) Old forecast. a is called weighting factor and can be estimated by the management for each type of product separately. a = 0.01 in the above ex ample.

28 26 Materials Management Principles of MRP Material requirements planning evolved from an approach to inventory management in which the following two principles are combined: (1) Calculation (versus forecast) of component item demand, i.e., dependent demand. (2) Time phasing, i.e., segmenting inventory status data by times Because of its focus on timing, an MRP system can generate outputs that serve as valid inputs to other systems in the area of manufacturing logistics, such as purchasing systems, shop scheduling systems, dispatching systems, shop floor control systems, and capacity requirements planning systems. MRP in Manufacturing Planning and Control Figure 4.1 is a general model of a manufacturing planning and control (MPC) system. Several supporting activities are shown for the front end, engine, and back end of the system. The front end section of the MPC system produces the master production schedule (MPS). The back end, or execution, systems deal with detailed scheduling of the factory and with managing materials coming from vendor plants. Material requirements planning is the central system in the engine portion of Fig It has the primary purpose of taking a period-by-period (time-phased) set of master production schedule requirements and producing a resultant time-phased set of component/raw material requirements. In addition to master production schedule input, MRP has two other basic inputs. A bill of material shows, for each part number, what other part numbers are required as direct components. The second basic input to MRP is inventory status. To know how many are on hand, how many of those are already allocated to existing needs, and how many have already been ordered. The Basic MRP Record At the heart of the MPC system is a universal representation of the status and plants for any single item (part number), whether raw material, component part, or finished good. This universal representation is the MRP time-phased record. Figure 4.2 provides an illustration, displaying the following information: (l)time bucket The top row in Fig. 4.2 indicates periods. The period is also called a time bucket. The most widely used time bucket or period is one week. A

29 Material Requirement Planning (MRP) 27 timing convention for developing the MRP record is that the current time is the beginning of the first period. The number of periods in the record is called the planning horizon. The planning horizon indicates the number of future periods for which plans are made. (2) Gross requirements The second row, Gross Requirements, is a statement of the anticipated future usage of or demand for the item during the period. The

30 28 Materials Management gross requirements are time phased, which means they are stated on a unique period-by-period basis rather than aggregated or averaged. (3) Scheduled receipt The Scheduled Receipt row describes the status of any open orders (work-in process or existing replenishment orders) for the Item due in at the beginning of the period. This row shows the quantities that have already been ordered. Period Gross requirements Scheduled receipts 50 Projected available balance Planned order releases 50 Lead time = 1 period Lot size = 50 Fig The Basic MRP Record (4) Projected available balance The next row is called Projected Available Balance. i.e., the row is the projected balance at the end of the period after replenishment orders have been received and gross requirements have been satisfied. An extra time bucket shown at the beginning shows the balance at the present time. (5) Planned order release Whenever the projected available balance would show a quantity insufficient to satisfy requirements (a negative quantity), additional material must be planned for. This is done by creating a planned order release at the beginning of the period in time to keep the projected available balance from becoming negative. (6) Action bucket The MRP system produces the planned order release data in response to the gross requirement, scheduled receipt, and projected available data. When a planned order is created for the most immediate or current period, it is in action bucket. A quantity in the action bucket

31 Material Requirement Planning (MRP) 29 means that some action is needed now to avoid a future problem. The action is to release the order, which converts it to a scheduled receipt. Bill of Materials Figure 4.3 shows a snow shovel, which is end item part number The product structure diagram and the indented bill of materials (BOM) are shown in Fig. 4.4 Gross to Net Explosion Explosion is the process of translating product requirements into component part requirements, taking existing inventories and scheduled receipts into account. The gross to net explosion process means that, as explosion takes place, only the component part requirements (net) of any inventory are considered as exemplified in Fig In this way, only the necessary requirements ate linked through the system. Leadtime Off Setting In addition to precedent relationships, the determination of when to schedule each component part also depends upon how long it takes to

32 30 Materials Management Fig. 4.4 Product Structure diagram GROSS AND NET REQUIREMENTS CALCULATION FOR THE SNOW SHOVEL

33 Material Requirement Planning (MRP) 31 Produce the part, i.e., the lead time. There are two alternatives in scheduling approaches. One is the front schedule logic, i.e., scheduling as early as possible. Another is the back schedule logic, i.e., scheduling as late as possible. Back scheduling has several obvious advantages. In MRP, the timing of the planned order release is arrived at by offsetting for lead time. MRP achieves the benefits of the back scheduling approach and can perform the gross to net explosion. Linking the MRP Records Figure 4.6 shows the linked set of individual time-phased -MRP records for the top handle assembly of the snow shovel. Technical Issues Processing frequency Since conditions change and new information is received, the MRP records must be brought up-todate so that plans can be adjusted to reflect these changes. This means processing the MRP records anew, incorporating the current information. Two issues are involved in the processing decision; how frequently should the records be processed, and whether all the records should be processed at the same time. (1) Regeneration When all of the records are processed in one computer run, it is called regeneration. This signifies that all part number records are completely reconstructed each time the records are processed. (2) Net change An alternative is net change processing, which means that only those records which are affected by the new or changed information and net change is the frequency of processing. Lot sizing In the snow shovel example of Fig. 4.6 we illustrated a fixed lot size and lot-for-lot procedure. Several other approaches to lot sizing are widely recognized.

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35 Material Requirement Planning (MRP) 33 Safety stock and safety lead time Carrying out detailed component plans is sometimes facilitated by the inclusion of safety stocks and/or safety lead times in the MRP records. Safety stock is a buffer of stock above and beyond that needed to satisfy the gross requirements. Safety lead time is a procedure whereby shop orders or purchase orders are released and scheduled to arrive one or more periods before necessary to satisfy the gross requirements. Low-level coding If Fig. 4.6 the time-phased record is processed for either of common parts before all their gross requirements have been accumulated, the computations will all have to be redone. The way this problem is handled is to assign low-level code numbers to each part in the product structure or the indented BOM. Pegging Pegging relates all the gross requirements for a part of all the planned order releases that created the requirements. The pegging records contain the specific part number or number of the sources of all gross requirements. The pegging information can be used to trade the impact of a material problem all the way up to the order it would affect. Service parts Service part demand must be included in the MRP record if the material requirements are not to be understated. The service part demand is typically based on a forecast and is added directly into the gross requirements for the part. Firm planned orders If changes have taken place since the last time the record was processed, the planned order releases can be very different from one record-processing cycle to the next. Since the planned orders are passed down as gross requirements to the next level, the differences can cascade throughout the product structure. One device for preventing this cascading down through the product structure is to create a firm planned order (FPO). FPO, as the name implies, is a planned order that the MRP system does not automatically change when conditions change.

36 5 Inventory Control Selective Controls Basic Terms Inventory: The term refers to the stock at hand at a given time (a tangible asset which can be seen, weighed or counted). It refers to the material held in an idle or incomplete state awaiting future sale or use. In the most general sense, inventory is an idle resource. Item: An element, mixture, compound, component, sub-assembly, finished good, production equipment or any other one piece tangible asset which forms inventory in an organisation. Inventory Policy: A definitive statement regarding the philosophy of inventory management, a policy stating when to procure and how much to procure, usually to ensure that the sum of all costs associated with the inventory process will be minimized. Inventory Control: A functional activity the objective of which is to minimize the total costs of maintaining inventories and of acquiring them in order to render the stipulated level of service. Inventory Classification Raw Materials: Basic materials for processing/conversion into finished goods e.g. Pig Iron, M.S. Rods, PVC Resin. Bought-out Components: Items not manufactured/fabricated by the organisation but used with or without further processing and/or packing the finished product; e.g. Rubber parts by an Engg. Co., Tin Cans by a Vanaspati Mill. Work-in-Process: Partly manufactured/processed inventories awaiting further manufacturing/processing between two operations and are in the process of being fabricated or assembled into finished products, including materials lying with sub-contractors and materials lying in shop floor for further processing or assembly.

37 Inventory Control 35 Finished Goods: The complete units and the assemblies carried in stock ready for delivery to customers or for transfer to other plants or for own use. e.g. A bicycle, a Football, A Lathe Machine. MRO: Maintenance, Repair and operating supplies. The group include spare parts and consumables which are required for use in the process but do not form a part of the finished product. e.g. lubricants, V- belt, Electrodes, pencil, soap, etc. Inventory Analyses Altogether the company deals with stock of thousands of items raising a serious problem of how one can keep control or track of all these items and also, whether it is necessary to have the same extent of control on each and every item or not. Different types of analysis each having its own specific advantages and purpose, help in bringing a practical solution to control inventory. The most important of all such analyses is the ABC analysis. The others are: VED SDE FSN HML XYZ Definitions and application of these analyses are tabulated as in the following pages.

38 36 Inventory Control

39 Inventory Control 37 While formulating inventory policy for an item a combination of various analyses is useful. For example, liberal safety stock may be kept for an item which falls into 'C', 'V' and 'S' categories and vice versa for an 'A', 'D' ai1d 'E' item. ABC Analysis ABC is said to connote 'Always Better Control'. The basis of analysing the Annual Consumption Cost (or usage cost) goes after the principles ' 'VITAL FEW TRIVIAL MANY", and the criterion used here is the money spent and not the quantity consumed. The figure given below brings out clearly the concept of ABC analysis. The general picture of ABC - analysis will show the following pattern :- In many cases, the figures bring out that the A items are still fewer in number representing the bulk of the money. To cite an example :-

40 38 Materials Management Class of items Item % % of Annual Usage Cost A 8 75 B C 67 5 It may be of interest to note that this ABC analysis i.e. the vital few; trivial many, principle is observed in most of the business problems such as number of dealers and volume of business; different items of expenditure of revenue and the amount involved, nature of customer complaints and number of complaints etc. etc. The controls necessary on A, B & C items are obvious "Thick on the best, thin on the rest". One of the Departmental stores modified this to state "Thick on the best to hell with the rest". Control on A Items The annual consumption cost being very high for these few items, any small percentage savings bring out large benefits such as reduction in expenditure, release of locked up capital etc. Normally, these items are to be under the direct control of the purchasing manager himself. All endeavours should be to reduce the safety stocks, low cost of purchasing, control on consumption and waste. The measures to be taken on 'A' items can be briefly put down as follows :- (i) Annual contract for supplies with as frequent staggered deliveries as is economical. (ii) Minimum safety stock or even fluctuating safety stocks by maintaining better vendor/vendee relationships, speculation of market conditions, supply conditions, etc. (iii) More frequent review of stock position and consumption patterns. (iv) Precise quality specifications or materials standard evolved. (v) Value Analysis to find cheaper substitutes, better source of supply and to reduce the overall costs. (vi) Waste control measures to reduce the scrap, rejection, rework and sub standards. (vii) Continuous developmental work or research carried out wherever possible. (viii) Possibility of adopting 'cock-system' when the materials are stored and supplied at the factory site by the supplier at his own cost.

41 Inventory Control 39 Control on C-Items The other extreme where a large number of items constituting a small percentage of costs, needs very simplified procedures and the objectives being to reduce the purchase costs as well as handling and distribution costs. The following measures are suggested :- i) Maintain sumptuous stocks (Avoid the proverb, "For the sake of a horse-shoe nail, the battle was lost' '). ii) Purchasing costs minimized through single tender system, blanket contract, travel orders, clubbing of similar items into one purchase order, purchasing annual requirements, blank cheque ordering procedure etc. iii) Inventory carrying costs & Paper work reduced by bulk issues, writing off the values (control through perpetual inventory) of stocks, variety reduction and standardization, pool-system. etc. Control of B Items On these items the controls are 'via-media' of A & C, Usually, the safety stocks are decided on a policy basis. Other Analyses The definitions and criteria of YED, SDE, FSN, HML and XYZ analyses have already been tabulated on pages Keeping in view the objective of such categorization and nature and, volume of inventory, the classification is made by each organisation suiting to its own requirements and controls. For example, non-moving items in an organisation may be the list of those items which were not consumed during a period of last one year while another organisation engaged in Projects or Maintenance Services may fix a period of even 2 or more years to identify such items. It is however useful to keep a list of 'V' items with stores officer, 's' with purchase officer and 'A', 'V', S' & 'N' with chief executive for continuous follow up & control. Economic Order Quantity (EOQ) Total cost of managing inventory of an item depends upon three factors :- (i) Ordering Cost (OC). (ii) Inventory Carrying Cost (ICC). (iii) Quantity Discounts (QD).

42 40 Materials Management Ordering Cost (DC) e Ordering cost is the cost of placing one order. Total ordering cost per order can be determined by estimating annual cost actually incurred during the past one year against following elements :- (i) Salaries + Perks paid to all the employees in the purchase department. (ii) Proportionate part of salary + perk of the executives and employees of other departments spending part of their time in making purchases. This will include accounts personnel associated with purchase department in evaluating quotations and making payments. Also QC department engaged in inspection and testing of purchased items. (iii) Traveling expenses related to procurement. (iv) Telephone, telegram 1 telex, postage and stationery relating to procurement. (v) Depreciation of accommodation (or rent of building) and equipm nt used for procurement. (vi) Insurance, power, water and other service charges relating to purchase department. (vii) Any other cost (entertainment etc.) incurred for purchasing. If N is the number of orders placed during the year, ordering cost There are many limitations in the above method of calculating ordering cost. Firstly the cost has been uniformally distributed to all orders by taking average. In actual practice there is wide variation from order to order. For example, the cost involved in procuring an item on the basis of tendering will be much higher than placing order to a standard supplier (evaluated best through vendor rating). Similar cost of procuring item from far off place will be much higher than local purchases. Secondly an order may contain only one item or ten or even more items. If separate orders for each item are placed the cost will be much higher than the common order for items at a time. Since the economic order quantities are being worked out order for each item, the above ordering cost, which may be for a group of items, will not indicate a clear picture of the OC relating to the item in question. Thirdly, by increasing no. of order in a year for an item, the quantity per order will reduce. The reduced quantity

43 Inventory Control 41 for some items may not be feasible due to exhorbitant freight whereas it may be feasible for other items having more requirements. It is therefore very difficult to assess the actual ordering cost/order separately for each item. Statistics therefore comes to our rescue and average figure is adopted assuming that each order is for one item only. It is, however, quite clear from the actual experience that up to certain number of orders a minimum ordering cost has to be incurred due to the minimum infrastructure required for the purchase department. After that placement of additional number of orders will require more purchase staff and other facilities and hence the ordering cost will go on increasing. Further, if the quantity per order is increased, -the total no., of orders to be placed per annum, assuming a fixed annual requirement, will reduce in inverse proportion. Less the no. of orders for an item per year, the lesser the ordering cost. The cost curve against ordering quantity per order is shown in Figure 5.1. Inventory Carrying Cost (ICC) Inventory carrying cost is the cost of holding inventory. Various elements of cost falling under this head are as given below:- (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) Interest Joss/opportunity loss on the capital locked up in the form of average inventory. Salaries and perks of the employees engaged in the stores. Depreciation of accommodation (or rent of building) occupied by stores and stores offices. Depreciation of handling equipment, racks, furniture and other facilities used in stores. Obsolescence of Items in stores. Deterioration, damage and pilferage of items during storage. Telephone, telex, postage and stationery used by stores. Handling expenses paid to contractors, transporters, etc. Insurance and taxes on stores. Electricity, oil, water and other service charges on stores. Any other cost relating to holding of stocks in the stores. The method of calculating ICC is to estimate cost against each one of the above elements during the past year and divide it with the average