MM ZG511-L15

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    BITSPilaniPilani Campus

    Manufacturing Organization

    and Management

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    BITSPilaniPilani Campus

    Inventory Management and ControlLecture 15

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    BITS Pilani, Pilani Campus

    Control of material in manufacturing.

    Control of the flow of material from a raw state to afinished product.

    Most industries buy material, transport it to the plant,change the material into parts, assemble parts intofinished products, and sell and transport the product tothe customer.

    The flow of material as they progress, with the aid of

    inventories, through the production cycle can bediagrammed as shown in the following figure.

    Introduction

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    BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

    Flow of material through production cycle

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    BITS Pilani, Pilani Campus

    The ultimate objective of all manufacturing controls is torealize a profit through the operation of the business.

    A more restricted objective of the control of material is tosatisfy the customer by meeting the schedule for deliveries.

    Failure of deliver order on time is one principal cause of loss

    of business and customers. Effective control of the material throughout the manufacturingcycle reduces the chance of this problem arising.

    Material must wait for machines or materials handlingequipment to become available and must be ordered inadvance of production and stored in a warehouse or storagearea.

    Japanese concept of just-in-timeproduction scheduling mayreduce manufacturingsdependence on inventories.

    Objectives of Inventory Management

    and Control

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    BITS Pilani, Pilani Campus

    Specific objectives of the inventory management andcontrol group are to maintain optimum inventorylevels and inventory turnover for operation of thebusiness at maximum profit

    Through the control of inventories, it should be

    ensured that the right material in the right quantity andof the right quality is made available at the right placeat the right time.

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    In the same manner that we identify the variousfunctions in material management with the flow ofgoods, we can identify the different types of inventoriesor stocks of material maintained in a manufacturing

    plant. All plants use the same general classification of

    inventories, including raw material, purchased parts,work-in-progress, finished goods, and supplies.

    Inventory Classifications

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    A raw material inventory includes all items that, afterbeing received at the plant, require additional processingbefore becoming an identifiable part of the finishedproduct.

    It is obvious that the finished product of one plant- suchas roll, bar, and sheet steel- may be the raw material ofthe next industrial purchaser.

    Raw Material

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    This classification of inventory is applied tocomponent parts of a product that need no additionalprocessing before being assembled into the finishedproduct.

    In some cases this material may be classified as rawmaterial inventory. More times than not, however, aseparate classification is justified.

    The TV picture tube that is the finished product of

    one manufacturer becomes a purchased part to thetelevision set manufacturer.

    Purchased Parts

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    This classification of inventory is self-explanatory.

    All material that leaves either raw material stores ofpurchased parts stores enters the work-in-processinventory until the product is completed and placed in

    finished goods. Work-in-process is the inventory of material, the flow of

    which is controlled by production control procedures tobe discussed in a later chapter.

    Work-in-Process

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    This classification applied to the quantities of finished goodsthat are held at the factory awaiting shipment.

    It will include stocks held in warehouses owned and operatedby the manufacturer, or stock held on dealers floors onconsignment.

    The value of the finished goods inventory is usually very highand a principal factor in the financial management of thecompany.

    A typical example of this is the piston ring manufacturer, who,in addition to supplying the original car manufacturer, also

    maintains large stocks of many different sizes of piston ringsin automotive supply houses for quick service to the autorepairman.

    These stocks are on consignment; that is the piston ringmanufacturer does not receive any payment for the goods

    until they have been sold by the distributor.

    Finished Goods

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    All the materials needed for the operation of the plantthat are not used as parts of the finished product areclassified as supplies.

    In the chapter on cost accounting we have identified this

    inventory classification as indirectmaterial. On the other hand, the material that becomes part of the

    finished product is called direct material. Lubricatingoils, sweeping compound, light bulbs, and many other

    items fall into the supply category.

    Supplies

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    The complex relationship between modern industry andits market presents a real problem in the size ofinventories that should be maintained.

    Large inventories in the face of declining sales meanlower profits.

    Small and inadequate inventories in the face of anincreasing market demand may result in the loss ofsales to competitorsand a decreased profit.

    Recognition of these conditions should indicate that theoptimum inventory is not necessarily either the

    minimum or the maximum level of inventory; nor is itoperation at a maximum inventory turnover.

    Optimum Inventory

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    A very common index of inventory control, inventoryturnover is the ratio of the value of the product shippedto the average investment in inventory for the sameperiod.

    Inventory tu rnover =(value of product shipped)/(valueof average inventory)

    Obviously, the higher this index, the lower the inventorylevels and the lower the cost of maintaining theinventories.

    Also, it is obvious that a high index indicates a shortermanufacturing cycle with all the saving inherent therein.

    Inventory Turnover

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    Throughout this century management scientists havedevoted considerable effort to the mathematicalformulation of inventory models.

    An elementary building block of this analysis has been

    the so-called economic lot size mode. Through the years, it has been used to determine

    manufacturing batch quantities for in-plant productionorders or purchase orders and also for determination of

    optimuminventory levels.

    Economic Lot Size Concept

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    The anticipated rate of usage of the part must beconsidered together with the time required to produce areplacement lot.

    Quantities should be established such that at all timesstock will be available to the assembly departments.

    This principle is used by the materials control group indetermining inventory levels.

    Rate of Usage

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    Next in importance is the cost to acquire the item. In amanufacturing situation this would be a setup cost.

    If the part is purchased an ordering cost would beincurred.

    For a cost such as this, the quantity purchased or made

    is important the larger the quantity, the lower the per-piece cost.

    Ordering Cost

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    Another factor to be considered is the deterioration orobsolescence of a large stock of parts.

    All these factors must be weighed by managementand an economic lot size determined that will result inthe acquisition of parts at an optimum cost per unit.

    Deterioration or obsolescence

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    The use of economic order quantity models has been in effect formany years, and the literature abounds with the many formulationsthat have been proposed.

    One of the problems that arises in the use of mathematical model isthe fact that many factors have a bearing on optimum lot sizes, andone cannot weigh all of them in a simple formula.

    Total cost = QI/2 + RS/Q

    Qo=(2RS/I)Qo= economic lot size,

    R= annual use of the item in units per year,S= cost each time a new lo is ordered (setup cost),

    I= carrying cost per unit per year

    Elementary lot size model

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    Optimal Order Quantity

    Expected Number of Orders

    Expected Time Between Orders Working Days / Year

    Working Days / Year

    = =

    = =

    = =

    =

    =

    Q*D S

    H

    ND

    Q*

    TN

    dD

    ROP d L

    2

    D= Demand per year

    S= Setup (order) cost per orderH= Holding (carrying) cost

    d=