Production & Operations Management

Inventory Control
Study Module
for
PGDM - INMANTEC, Ghaziabad.
By
Prof S.S.Sharma
 Production Planning & Control
Inventory Control

Concerned with achieving balance between the competing

objectives:
1. Minimize cost of maintaining or carrying inventory
2. Maximize the service to customers
 Inventory Control

Inventory carrying Costs:

a. Investment cost:
A dominant factor of inventory carrying cost.
-Company investing borrowed money to buy material at a certain interest rate
in material that have not yet been delivered to the customer for payments.

b. Storage Cost
c. Cost of possible obsolescence or spoilage
 Inventory Control

How do we minimize the cost of carrying inventory?


Maintain Zero inventories

Customer service may suffer

Resulting in loss of business.
Cost referred is called Stock Out Cost:

Minimize stock out cost

Provide a high level of customer service.
 Inventory Control

Inventory control procedure to be used depends on type of demand for the item.

Types of demands:
1. Independent Demand
 Demand or consumption for the item is un-related to demand for other items.
Example: End products and spare parts

2. Dependent Demand
 Demand for the item is directly related to demand for something else, usually because the item is a
component of an end product, subject to independent demand.
Example: An automobile is an end product having independent demand, while tyres and other components
required to build the automobile falls in the dependent demand category as their demand depends on
demands of automobiles to be manufactured.
 Inventory Control

An automobile is an end product having independent demand, while tyres

demand depends on demands of automobiles.

Replacement Components, like tyres represent :

1. Dependent demand in new car business
2. Independent demand in the replacement tyre market.
 Inventory Control

Systems of Inventory Control:


Different inventory control systems required, depending upon
which type of demand we are attempting to manage
1. Order Point System:
2. Material Requirement planning
 Inventory Control
Systems of Inventory Control

Order Point System :


Used for control of inventories of independent demand items

Addresses two important issues
a. How much to order?
b. When to order?
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?

Decided by means of using economic order quantity formulas.
When to order?

Accomplished using reorder points.
 Systems of Inventory Control
Order Point System
Inventory Level Model
Maximum Inventory
level

Replenishment Demand Rate

Inventory Level

Q
Average Inventory
Level

O
Time
Time
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?
Total Annual Inventory Cost equation:
TIC = Ch Q / 2 + Csu Da / Q
Where TIC = Total Annual Inventory Cost (Carrying + ordering cost) Rs./Yr
Q – Order quantity, pieces/order
Ch – Holding Cost (cost of carrying the inventory), Rs. / piece /Yr
Da – Annual Demand for the item, pieces/yr
Csu – Cost of setting up an order, Rs. / setup or Rs./ order
Da/Q = the number of orders (batches of parts produced) per year, this gives number
of set up per year.
 Inventory Control
Systems of Inventory Control

Order Point System :

How much to order?
Economic Order Quantity:
EOQ = Sq Root of 2Da Csu / Ch
Da – Annual Demand for the item
Csu – Cost of setting up an order
Ch - Holding Cost i.e cost of carrying the inventory
 Inventory Control
Systems of Inventory Control

Order Point System :

When to Reorder

Follow the reorder point system
To be high enough level so as to minimize the probability of a
stock out.
- Implemented using computerized inventory control systems
 Systems of Inventory Control

Operation of a reorder point inventory system

Demand Rate
Inventory Level

O
Time
Reorder Point
Time Buffer Stock

Reorder lead time

 Material & Capacity Requirement Planning
Material Requirement Planning (MRP)
Computational procedure to convert the master production schedule for end
products in to a detailed schedule for raw materials and components used in
the end products.
•
Detail schedule indicates :

Quantities of each item

When it must be ordered

When it must be delivered to achieve the master schedule

Technique used for determining quantities of dependent demand items
constituting the inventories of raw material, purchased parts, work in process
etc.
 Sales orders
Sales Service Parts
Forecasts Requirement
Product Design
Master
production
schedule
Bill of materials
file
Material Capacity
Inventory requirements planning
record file planning

Orders released & other outputs

Structure and Data flows in a Material Requirements

Planning (MRP) system
 Material & Capacity Requirement Planning
Material Requirement Planning (MRP)
Inputs to the MRP system:
1. Master production schedule
2. Bill of material file
3. Inventory Record file
4. Capacity requirement planning
 Material Requirement Planning (MRP)
Inputs to the MRP system:
Bill of material (BOM) file:
•
Lists component parts and sub-assemblies that make up each product
and used in computing the requirement of raw material and
components used in the end products listed in the master schedule.
•
Case: Simplified structure of an assembled product.

Product consists of two sub-assemblies

Each sub assembly consisting of three parts

Number of each item in the next level is indicated in parentheses
 Material Requirement Planning (MRP)
Inputs to the MRP system:
Inventory Record file:
•
Identifies each item by part number and gives time-phased
record of its inventory status.
•
Data includes gross requirement for the item i.e. How many
units will be needed to build products in the master schedule
 Material Requirement Planning (MRP)

How MRP System Works?

Based on inputs from the master schedule, bill of material file and the inventory
record file, MRP processor computes how many of each component and raw
material will be needed in future time period by “exploding the end product
schedule in to successively lower levels in the product structure.

For every unit of final product listed in MPS, the required number of
components of each type must be ordered or fabricated. Its ordering or
manufacturing lead time to be taken in to account.

For each component, the raw material must be ordered, accounting for its
ordering lead time.

Assembly lead time to be considered in the scheduling of sub-assemblies and
final products.
 Material Requirement Planning (MRP)
How MRP System Works?
Material Requirement Planning Case: Component C4 of Product P1.
The required deliveries for P1 are as given in the MPS. As per product structure two
units of C4 are required to make sub-assembly S2 and two S2 units are required to make
final product P1. C4 is made out of raw material M4, and one unit of M4 is used to
make each unit of C4.
Ordering, manufacturing and assembly lead times for items:
Item Identification: P1 S2 C4 M4
Lead Time (weeks): 1 1 2 3
Inventory status in units: 0 0 50
There are no scheduled requirements, receipts or order releases indicated in the
inventory records for these items. Neither material M4 nor component C4 is used on any
other product. Determine the time phased requirement for M4, C4 and S2 to meet the
master schedule for product P1. Orders for P1 beyond period 9 to be ignored in this
case.
 Material Requirement Planning (MRP)

How MRP System Works?

Material Requirement Planning Case: Component C4 of Product P1.
Case Solution:
Deliver Requirements for P1 must be offset by 1 week to obtain the planned
order releases. S2 must be exploded by 2 units per P1 unit and offset by 1 week
to obtain its order release. C4 is exploded by 2 units per S2 units and offset by
2 weeks to obtain its requirements and M4 is offset by its 3 week ordering time
to obtain its release date, taking in to account current stock of M4 on hand.
..\Material Requirement Case solution P1-C4.xls
 Material & Capacity Requirement Planning
Capacity requirement planning
Objective:

To determine the labour and equipment requirement needed to
meet the master Production Schedule.

To identify company’s long term future capacity needs

To identify production resource limitations in order to plan a
realistic Master Production Schedule.
 Capacity Requirement Planning
Relationship between Capacity Planning and other function in PPC:
 The Master Production Schedule reduced to material and component requirement
using MRP. This provides estimates of the required labour hours,
machinery/equipments and other resources required to produce the components.
 The required resources compared to plant capacity over the planning horizon.
 Compatibility of master production schedule with plant capacity is checked and
adjustment made to the schedule or plant capacity.
 Capacity Requirement Planning
Plant Capacity Adjustment Short – Term, Includes:
1. Employment Level – Direct labour hours increased or decreased.

2. Shift Hours – Labour hour per shift increased or decreased thru overtime or reduced hour working
3. Number of work shifts - per production period increased or decreased , authorizing evening and night
shifts and or using week end shifts
4. Inventory stockpiling – Used to maintain steady employment period during slow demand period
5. Order Backlogs – deliveries delayed/prioritized during busy period when resources insufficient to
keep up with demand.
6. Subcontracting- Contacting work (Out sourcing) during peak period or taking in extra work during
slack period.
 Capacity Requirement Planning
Plant Capacity Adjustment Long – Term, Includes:
1.New plant equipment and machinery. Enhancing the plant capacity
requires long lead time. Investment in:

Additional Machinery

More productive machinery

New Type of machines to match future changes in product design.

2. New Plant Facility (Additional)


Construction of new plants

Purchase of existing plants from other companies

3. Plant Closing : Closing of production facility which is not required in future

due to lack of demand or obsolescence.
 Production Planning & Control
Just -In -Time Production
JIT – Just In Time: Approach developed in Japan to Minimize
inventory cost. Work in process and other inventories are viewed as waste to
be eliminated as it ties up space and investment funds. Principles and
procedures aimed at reducing inventories directly or indirectly.
JIT procedures proved most effective in high volume repetitive
manufacturing such as automobile industry. A just time production produces
exactly the right number of each components required to satisfy the next
operation in the manufacturing sequence just when that component is needed
– Just in Time.

The Ideal Batch size – One Part. Practically more than parts are produced at
a time but the batch size is kept small.

In JIT philosophy producing too many units is to be avoided as much
producing too few units.
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:

1. Stable Schedule: Work must flow smoothly with minimum disturbances. A Master
Production Schedule that remains relatively constant over time is one way of
achieving smooth work flow and minimizing disturbances and changes in production.
2. Small Batch sizes and setup reduction: Use of EOQ formula to compute batch
size. Efforts to be focused on finding ways to reduce set up time.

Use of quick acting clamping devices instead of nuts and bolts

Perform as much of the setup work as possible while previous jobs still running.

Eliminate or minimize adjustments in setups

Use of group technology , cellular manufacturing: Similar part styles produced on the
same equipments, i.e. Machining Centers etc..
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
3. On time delivery, Zero defects and reliable equipments

Small lot size requires parts to be delivered before stock out occur at
downstream stations (final Assembly).

Workers inspect their own output to make sure it is right before it moves o
the next operation.

Low work in process requires reliable production machinery & equipment.

Emphasis on reliable equipment design and preventive maintenance
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
4. Pull system of production control:

Order to produce parts at a given work station comes from the downstream
station (Assembly or Final Assembly) that uses those parts.

As the supply of parts becomes exhausted at a given station it places an
order at the upstream station (parts manufacturing /feeding) to replenish the
supply.

Procedure repeated at each workstation in the plant has the effect of pulling
parts through the production system

Push system of production operates by supplying parts to each station in the
plant. Driving the work from upstream station to downstream station.

Kanban (Kahn-bahn): Toyota Pull System
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
Pull system of production control:

Kanban (Kahn-bahn): Toyota Pull System
The Kanban System of production control is based on use of cards to
authorise production and work flow in the plant.

Types of Kanbans:
1. Production Kanban
2. Transport Kanban
 Production Planning & Control
Just -In -Time Production
Kanban (Kahn-bahn): Toyota Pull System

Production Kanban
Parts

A B C D

Work station
Transport Kanban

Operation of a Kanban System Between workstations

 Just -In -Time Production
Toyota Pull System

Operation of a Kanban System Between workstations
Station B is the supplier in the pair of B & C station, and C is the consumer. Station
supplies down stream station D. B is supplied by upstream station A.

When station C starts work on a full container, a worker removes the transport
Kanban from that container and takes it back to station B.

The worker finds a full container of parts at B that has just been produced, removes
the production kanban from that container and places it on a rack at B.

The worker then places the transport kanban in the full container, which authorises its
movement to station C.

The production kanaban on the rack at station B authorizes production of a new batch
of parts.

The kanban pull system between stations A and B and between station C and D
operates the same way as it does between station B and c
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
5. Work force and supplier Base;

Workers to be cooperative, committed and capable of performing multiple
tasks

The work force to inspect the quality of their work and to deal with minor
technical problems with the machinery so that major breakdown do not
occur.

Suppliers to hold to the standards of on time delivery, zero defects and other
JIT requisites as the company itself.
 Production Planning & Control
Just -In -Time Production
Requisites to successful implementation of JIT:
5. Work force and supplier Base;
Vendor Policies for JIT.

Reducing the total number of suppliers

Selecting and developing vendors/suppliers with proven track records for
meeting quality and delivery standards.

Establishing long term partnership with suppliers

Selecting the suppliers that are located near the company’s manufacturing
facility/plant