P.O.M.

Control Strategies

Objectives

• Students should be able to examine the various strategies used in production control.

1.0. Introduction• Effective P.O.M. requires:

– Planned production– Coordinated and controlled production.

• Progress must be monitored to check that production schedules are met and corrective action when necessary.

• Monitoring is essentially to ensure that sufficient raw materials, equipment and labour are available when required so that production an run smoothly and costs are kept at a minimum.

• To achieve this involves establishing and implementing appropriate policies and systems for key factors such as:

• Product design control• Material control• Inventory control• Quality control

2.0 Design Control

• Students would have already been aware of the importance of market research and the need for a product strategy. An important stage in the creation of new products or the improvement of existing one is the product is that of design.

• The purpose of design control in a business is to regularly review the features of all products in the range to ensure that they both meet customer’s expectations and are also cost effective to produce.

• Important in markets where technology is changing rapidly (e.g. computers).

2.A. Design factors

• The main design factors to be considered are:I. PERFORMANCE. To be successful a product needs to be:

Functionally efficient Reliable Safe Easy and economical to use Easy to maintain.

II. APPEARANCE. Essentially, unless a product looks appealing, even though it functions well, it is unlikely to be successful.

III. ECONOMY IN PRODUCTION, DISTRIBUTION AND STORAGE. Production at a reasonable costs can be affected by:

Raw materials and components Packaging Shipping requirements storage

IV. LEGAL REQUIREMENTS. Health and safety Consumer protection legislation.

V. ENVIRONMENTAL FACTORS. Environmental legislations Public concern about the effects of many products and

manufacturing processes on the environment.

VI. VALUE ANALYSIS. To determine that all materials and components used in a product

is commensurate with its costs. A way of meeting consumer demand , at a profit, through a

systematic process of product improvement

2.B. Materials Control• Every organisation needs to purchase supplies:

Manufacturing – raw materials and components. Own Use – stationery and furniture Resale – goods purchased by wholesalers and retailers.

• The purchasing function critical to efficient and effective materials (raw, components,

finished goods) control. Must ensure: Right goods Right price Right quantity Right quality Right time

• Activities of the purchasing department includes: Finding the best sources of supply Bulk buying Handling purchase requisitions Providing reports - price movements, availability

2.C. Inventory Control• Most organizations need to carry stock which could include:

Materials Components Work-in-progress Finished goods Stationery

• If too much stock is held this takes up storage space and ties up cash whilst a shortage of stock can cause delays in production and possible lost of sales

• Proper stock control should ensure that stock is always available when needed.

• The amount of stock required will depend on: Type of product Stockturn Size of organization

• Costs:– Storage costs – warehousing, etc.– Depreciation costs – wear and tear, perishability,

shelf-life, etc.– Opportunity cost – zero revenue earned on stocks

sitting around!– Administration costs – monitoring stock levels,

ordering and processing, etc.

• Benefits:– Availability of stocks to meet customer needs– Buffer stocks help to cope with unplanned

changes in demand– Smoothes out the volatility of lead times

2.C.I. Inventory Control Methods

A. The TWO-BIN System Involves two bins or containers for each item

stored. As one bin is emptied more stock is ordered to arrive to replace it before the second bin is used.

B. THE STOCK CONTROL GRAPH

The Stock control Graph

StockLevel

Time

Maximum Stock Level

Minimum Stock Level

Re-order level

The Traditional Stock Control Model Maximum stock levels achieved after stock delivery. Stock levels decline during production.

When the stock level reaches the re-order level, it triggers a new order. The difference between the time of re-order and delivery is the ‘lead time’.

Lead Time

Re-order triggered

• A simple stock control graph like that shown above can be used to illustrate when ordering should take place and how much should be ordered.

• Each vertical line represents a new delivery of stock.• The slanting lines represent the use of stock.• A new order is placed when stock falls to the RE-ORDER

LEVEL.• The delay between placing an order and the stock being

delivered is called the LEAD TIME.• The minimum level is the BUFFER or amount of stock kept in

reserve.

c. Economic Order Quantity (EOQ)

• Inventory Costs:• Storage Costs

– Warehousing– Security– Insurance– Deterioration– Obsolescence– Pilferage– Interest on capital tied up

Balanced against

• Ordering Costs– Administration– Transport– Handling– Inspection– Accounting

• As ordering costs per unit increase (large orders) Storage costs per unit decreases (fixed costs spread over a larger number of items) and vice versa.

• The EOQ model is used to calculate the quantity which minimizes total costs.

The EOQ Formula

2CDEOQ = ----------------

H

Where C = cost of placing an order (Order Costs)D = Annual rate of demand (Quantity)

H = Cost of holding one unit of stock for a year. (Average unit Storage Costs)

EOQ Practice Problems

1. The annual demand for an item is 10,000 units The cost of holding one unit in stock for a year is $0.15 and order costs $30 to deliver. Calculate the EOQ.

2. From the following information, calculate the EOQ. A supermarket sells 80,000 packets of sugar annually. Delivery costs $31 per order and the cost of holding a unit in stock is 12% of total costs.

D. Quality Control• Quality refers to the features of a product that best fulfill the particular needs of

consumers at a price that they are willing to pay.• It involves meeting the production standards set by the firm.• The object of quality control is:

• to prevent faulty components or finished goods being produced thereby reducing the scarp and re-work costs.

• helping to increase customer satisfaction.

• The value of quality control is that it actually reduces the costs of production.• Advantages of producing quality products include:

• Gives competitive advantage• Encourages return purchases• Provides customer with information and builds consumer confidence in the brand• Reduces costs incurred

in solving post sales problems• Helps improve efficiency• Longer life cycles• Reduction in advertising costs• Allows for the charging of a ‘price premium’.

Quality Control Techniques

1. PREVENTION. Quality should be ‘designed into’ a product’

2. INSPECTION.3. CORRECTION AND IMPROVEMENT. Involves

correcting both the faulty product and the process that caused the fault.