Industrial Engineering. Faculty Ruchita Joshi

Transcription

1 Industrial Engineering Faculty Ruchita Joshi

2 Index Unit 1 Productivity Work Study Unit 2 Unit 3 Unit 4 Plant layout and materials Handling Replacement Analysis Maintenance Management Inventory Control Quality Control Industrial Ownership Manpower Planning Organization Job Evaluation & Merit rating

3 Unit - 3 Chapter - 6 Inventory Control

4 Classification of inventories Inventory may be classified as: 1. Direct inventories 2. Indirect inventories 1. Direct inventories Raw materials: Materials which are machined or processed before they are ready to be used in assembly of finished products. Ex. Steel (angles, channels, flats, tubes, plates, sheets etc.), copper, tin, lead, cotton, rubber, leather, wood, forgings, castings, etc. Purchased parts: Purchased items from outside supplies (components, sub-assemblies, finished parts, etc. ) instead of manufacturing in the factory itself. Ex. Ball bearings, screws, nuts, bolts, tyres etc. Work-in-process (partially completed) products (WIP): Semi finished goods at various stage of manufacture. The output of one machine is fed to another machine for further processing. WIP can be found on the conveyors, pallets, in and around the machines etc. Finished goods: These are the output of the production process. These are the finished (final) products ready for dispatching to the customers.

5 Classification of inventories contd 2. Indirect Inventories Tools: Various tools used for processing are classified as: Standard tools used on machines such as lathe tools, milling cutters, drills, reamers, taps, broaches, chasers, form tools etc. Hand tools such as hand saws, chisels, drill guns, hammers, mallets, pliers, spanners, wrenches, punches etc. Supplies: It includes material used in running the plant but do not go into the product. Supplies include: Miscellaneous consumable stores such as brooms, cotton waste, toilet paper, vim powder, jute etc. Welding, soldering materials such as electrodes, welding rods, solder etc. Abrasive materials such as emery paper, emery belts, emery cloth, graphite etc. Empties such as bags, glass bottles, cardboard boxes, drums, jars etc. Oils and greases such as kerosene, transformer oil, petrol, diesel etc. General office supplies such as pencils, refills, files, pins, papers, carbon paper, erasers etc. Printed forms such as envelopes, letterheads, enquiry forms, tender forms, requisitions forms, vouchers, invoices etc.

6 Inventory functions As inventory is the blocked Working Capital of organization, ideally it should be zero, but it is not. This is due to: Ensure against delay in deliveries and hence improve customer service & have better customer relations. Maintain smooth and efficient production flow. Take care of fluctuations in demand and lead time. Take care of increasing price tendency of commodities. Ensure against scarcity of materials in market. Take advantages of quantity discounts. Get savings in transportation. Have a better utilization of men and machinery. Prevent from unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) Allow for possible increase in output.

7 Determining Inventory level Inventory must be maintained at a proper level and provided in a timely fashion, otherwise production efficiencies will erode, as in the case of a service or manufacturing business, or sales will plummet, as in the case of a wholesaling or retailing business However, finding that proper level is easier said than done. To do this following factors should be considered: How much capital is available to purchase inventory? How much and what kind of consumer demand exists in the marketplace and how will this effect sales projections? How much inventory have you sold in the past? What are the industry averages for your type of business? What and how much are your inventory carrying costs and how do they increase as your inventory levels increase? Can quantity discounts actually save you money in the long run? How much storage space do you have or have access to? How much inventory do your suppliers actually have available to sell.

8 Inventory Management A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. Purpose of inventory management how many units to order when to order

9 Cost associated with inventory 1. Purchasing costs It includes unit cost 2. Ordering cost (inventory procurement cost) It includes receiving and inspecting the items in the orders. 3. Holding Cost or Carrying cost include the opportunity cost associated with storage. 4. Shortages cost or Stock-out costs of the investment tied up in inventory and the costs It occurs when an organization runs out of a particular item for which there is a customer demand. 5. Quality cost It is that cost of a product or service is its lack of conformance with a pre-specified standard.

10 Ordering Cost

11 Ordering Cost Ordering Cost Order Quantity

12 Carrying Cost Holding or Carrying cost IT is also known as holding cost & are the costs incurred due to maintaining an inventory level in the organization. IT consists of the following: Storage cost. It again includes Rent for storage facilities Salaries of personal and related storage expanses (upkeep of material, record keeping) light, maintenance. Cost of obsolescence. Cost of deterioration, spoilage. Cost of insurance. Cost of interest lost on capital invested. Cost of pilferage (theft) of material and employing a person for safety. Carrying costs are almost directly proportional to order quantity.

13 Ordering Cost Carrying Cost Order Quantity

14 Shortages Cost Shortages cost or stock-out cost When there is a stock out situation, the customer demand is not satisfied. In case of raw material/wip shortages, the production gets disrupted which causes loss due to emergency purchase. Unsatisfied customer results in: loss of goodwill lost sale due to two reasons. The lost sales may be due to two reasons: The customer may postpone or drop the idea to purchase The customer may go to another producer of similar product/services.

15 Inventory models Inventory models determine when and how much to carry Inventory models handle chiefly two decisions How much to order at one time. When to order this quantity to minimize total costs. There are the following type of inventory models Static Inventory models: It is applicable in cases where only one order can be placed to meet the demand. Repeat orders are either impossible or too expensive. Examples include perishable goods like bread, vegetables etc., seasonal products like coolers, umbrellas, crackers, sweaters, rain coats etc. Dynamic inventory models: It is applicable for items where repeat orders can be placed to replenish stock. It can be further classified as: Deterministic models: These models are based on assumption that the demand as well as lead time of an item are deterministic (i.e. known with certainty.) It may be of two types: Purchase inventory models, Production inventory models Probabilistic models: These models take into account the variations in demand and lead time of an item.

16 Economic Order Quantity (EOQ) A problem which always remains is that how much material may be ordered at a time. An industry making bolts will definitely like to know the length of steel bars to be purchased at any one time. This length of steel bars is called Economic Order Quantity. EOQ, or Economic Order Quantity, is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory. The scope of EOQ in organization How much inventory should we order each month? The EOQ tool can be used to model the amount of inventory that we should order each month.

17 EOQ Assumptions The assumptions in calculating economic order quantity are: Production is instantaneous: there is no capacity constraint and the entire lot is produced simultaneously. Delivery is immediate: there is no time lag between production and availability to satisfy demand. Demand is deterministic: there is no uncertainty about the quantity or timing of demand. Demand is constant over time: in fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit. A production run incurs a fixed setup cost: regardless of the size of the lot or the status of the factory, the setup cost is constant. Products can be analyzed singly: either there is only a single product or conditions exist that ensure separability of products.

18 Inventory Level Inventory reorder cycle Order quantity, Q Demand rate Reorder point, R 0 Order placed Lead time Order receipt Order placed Lead time Order receipt Time

19 How EOQ works The Principles Behind EOQ: The Total Cost Curve & Box (a) shows the inventory carrying costs, or the costs associated with holding inventory. These costs increase as you hold more and more inventory. Box (b) shows the order processing costs, also known as the procurement costs. The costs decrease as the order quantity increases. Box (c) combines these two graphs to reflect the total variable costs associated with the order quantity. This new graph is called the Total Cost Curve. The minimum cost per unit on the graph gives the Economic Order Quantity.

20 How EOQ works contd The Total Cost Formula Total Cost = Purchase Cost + Order Cost + Holding Cost P = Purchase cost per unit R = Forecasted monthly usage C = Cost per order event (not per unit) Q = The number of units ordered F = Holding cost factor This represents the unchanging fixed costs. The unchanging fixed costs are simply the amount required per unit multiplied by the monthly usage. This represents the variable order costs. The order cost is not all the costs associated with the purchasing and receiving departments. These costs are not associated with the quantity ordered but primarily with physical activities required to process the order. This represents the variable holding costs. The holding cost factor is the factor of the purchase cost that is used as the holding cost (this is usually set at 10-15%, though circumstances can require any setting from 0 to 1). Multiplying the purchase cost times the holding cost factor times the quantity then averaging by two gives us the holding costs.

21 How EOQ works contd The Total Cost Formula Taking the derivative of both sides of the equation and setting equal to zero to find the minimum value of the function, one obtains: The result of differentiation The Economic Order Quantity

22 Material Requirement Planning (MRP) Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. The scope of MRP in manufacturing The basic function of MRP system includes inventory control, bill of material processing and elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing and delivering activities. "Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required."

23 Material Requirement Planning (MRP) Contd Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below: If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time. If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash while it remains as stock and may never even be used at all. Beginning production of an order at the wrong time can cause customer deadlines to be missed. MRP is a tool to deal with these problems. It provides answers for several questions: What items are required? How many are required? When are they required?

24 Material Requirement Planning (MRP) Contd MRP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced internally, that are components of more complex items. The data that must be considered include: The end item (or items) being created. This is sometimes called Independent Demand, or Level "0" on BOM (Bill of materials). How much is required at a time. When the quantities are required to meet demand. Shelf life of stored materials. Inventory status records. Records of net materials available for use already in stock (on hand) and materials on order from suppliers. Bills of materials. Details of the materials, components and sub-assemblies required to make each product. Planning Data. This includes all the restraints and directions to produce the end items. This includes such items as: Routings, Labor and Machine Standards, Quality and Testing Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.

25 MRP System MRP System MRP system has three major input components: Master Production Schedule (MPS): MPS is designed to meet the market demand (both the firm orders and forecasted demand) in future in the taken planning horizon. MPS mainly depicts the detailed delivery schedule of the end products. However, orders for replacement components can also be included in it to make it more comprehensive. Bill of Materials (BOM) File: BOM represents the product structure. It encompasses information about all sub components needed, their quantity, and their sequence of buildup in the end product. Information about the work centers performing buildup operations is also included in it. Inventory Status File: Inventory status file keeps an up-to-date record of each item in the inventory. Information such as, item identification number, quantity on hand, safety stock level, quantity already allocated and the procurement lead time of each item is recorded in this file.

26 Material Requirement Planning System Architecture

27 Objectives of MRP MRP has several objectives, such as: Reduction in Inventory Cost: By providing the right quantity of material at right time to meet master production schedule, MRP tries to avoid the cost of excessive inventory. Meeting Delivery Schedule: By minimizing the delays in materials procurement, production decision making, MRP helps avoid delays in production thereby meeting delivery schedules more consistently. Improved Performance: By stream lining the production operations and minimizing the unplanned interruptions, MRP focuses on having all components available at right place in right quantity at right time.

28 Supply Chain Supply chain: Is also referred to as the logistics network. It may also be defined as all facilities, functions, activities, associated with flow and transformation of goods and services from raw materials to customer, as well as the associated information flows. It comprises of suppliers, manufacturers, warehouses, distribution centers and retail outlets facilities and the raw materials, work-in-process (WIP) inventory & finished products that flow between the facilities. An integrated group of processes to source, make, and deliver products.

29 Supply Chain illustration Plan Source Make Deliver Buy Suppliers Manufacturers Warehouses & Distribution Centers Customers Material Costs Transportation Costs Costs Manufacturing Costs Transportation Transportation Inventory Costs Costs

30 Supply Chain Management Supply chain management: A set of approaches used to efficiently integrate Suppliers Manufacturers Warehouses Distribution centers So that the product is produced and distributed In the right quantities To the right locations And at the right time System-wide costs are minimized and Service level requirements are satisfied SCM is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer.