POM Lecture (35) | Inventory | Invoice

Unit 2 Management of Conversion System Chapter 11: Resource Planning

Lesson 34- Tutorial 10 Good Morning students, today we are going to have a tutorial session for the previous lesson. The overall objective is to appreciate how the theoretical concepts are translated and applied into practical business situations. We would start with a few problems to review our conceptual understanding and wind up the session with a well-designed case study. I hope the session results into value addition for all of us. Let’s put our thinking caps and start now.


The demand that drives the production of automobiles is affected by the condition of the economy; therefore, it is considered dependent demand a. b. TRUE FALSE


Statistical forecasting is the primary tool for the determination of dependent demand. a. b. TRUE FALSE


A component is an item that may go through one or more operations to be transformed into or become part of one or more parents. a. b. TRUE FALSE TRUE FALSE


Any good manufactured from one or more components is called a parent. a. b.


A recognition award is assembled from a wood plaque, a stiff paper certificate, a Plexiglas sheet, and four decorative screws. The Plexiglas sheet is an example of a parent.

a. b. 6.


A component, always, may be categorized by dependent demand. c. d. TRUE FALSE


Material requirements planning (MRP) is a computerized information system that was developed specifically to help companies manage dependent demand inventory and schedule replenishment orders. e. f. TRUE FALSE


A bill of materials database and the master production schedule are the minimum essential inputs for effective use of an MRP system. g. h. TRUE FALSE


The bill of materials is a document used to compare price data from competitive suppliers. i. j. TRUE FALSE


End items, intermediate items, and subassemblies, may be classified as both a parent and component items in inventory. TRUE FALSE


An MRP explosion is an engineering diagram that shows each element of a subassembly, component, or end item.



A desirable competitive strategy is achieved when a component has multiple parents. TRUE FALSE


Action notices are electronic messages that automatically initiate an action such as releasing new orders. TRUE FALSE


Capacity requirements planning (CRP) is an essential bridge between the material equirements plan and the plant's production capacity.

TRUE FALSE 15 Manufacturing resource planning (MRP II) is a system that ties the firm's MRP with the up line suppliers' systems to promote supply chain management.

TRUE FALSE 16 Which of the following items represents independent demand? a. b. c. d. 17 a. b. c. d. 18 goods? a. b. c. d. Pick-up truck Refrigerators hotel rooms sold hospital bed sheets sliced pickles hub caps Houses Lavatory reduce inventory levels utilize labor and facilities better improve customer service forecast finished goods demand

Which of the following is not a benefit of an MRP system?

Which of the following is an example of dependent demand for manufactured


The total demand for a component item is derived from: a. b. c. d. the calculation of demand based of the demand of the parent item. the statistical forecast of the component demand. both a and b none of the above


An MRP system provides which of the following advantages? a. automatic update of the dependent demand and replenishment schedules of components when parent schedules change. b. statistical forecast of component demand c. smoothing of lumpy demand d. none of the above


The key inputs to an MRP include: a. b. c. d. engineering drawing of the product process chart inventory record database both a and b


An item that is assembled from two or more components and is also categorized as WIP is described as a(n) _________________. a. b. c. d. end item intermediate item Subassembly purchased item


A component that has one or more parents and no components is most likely to be

a(n) ________________. a. end item

b. c. d. 24

intermediate item Subassembly Purchased item

Which of the following is NOT an inventory transaction? a. b. c. d. Scheduled receipts Canceled orders Verifying scrap losses Storage space limitations


In a facility using a make-to-order strategy, the planning lead-time factor with the greatest variability is _________________. a. b. c. d. Setup time Process time Materials handling time between operations Waiting time


The listed lot sizing method that best minimizes the inventory levels is: a. b. c. d. Economic Order Quantity Periodic Order Quantity Lot for Lot Not enough information given


Which of the following statements are true about action notices? a. b. c. d. They automatically trigger electronic release of orders They are issued when there is a nonzero quantity in the action bucket. They are generated each time the MRP system is updated. both b and c


Which statement about capacity requirements planning (CRP) is NOT true?

a. CRP systems adjust the order release time to prevent a workstation from exceeding its capacity. b. CRP systems access inventory records to determine when planned orders or scheduled receipts will reach a workstation. c. CRP systems enable the identification of "critical" workstations. d. he purpose of CRP is to match THE material requirements plan with the plant's production capacity. 29. In service resource planning, demand for core services may be forecast while dependent demand is derived for which of the following service elements. a. b. c. d. 30 supporting materials Staff Equipment all of the above

An end item "A" is assembled from two (2) "B" components and two (2) "C" subassemblies. The "C" subassembly is composed of one of each components "B" and "D." If the gross requirement for "A" is 100 units, what is the demand for component "B"? a. b. c. d. 100 200 400 800


MAGI Corporation deals in maintenance of agricultural tractors as well as in the supply of tractor spare parts. MAGI’S spare parts division has its central store at Bangalore and eight branches in different districts of Karnataka state. THE division deals in spares for different makers of tractors and implements. It maintains inventories of spare parts, both for indigenous and imported models. These models of tractors include Zetors, Utos, Byclarus, Ursus and Russian, which are imported, and MASSEY FERGUSON, ESCORT and

INTERNATIONAL HARVESTER, which are indigenous. Spares for the imported tractors are also imported. The total number of spare part items is around 7000 and only about one –sixth of these are available from Indian suppliers. The purchase of spare parts is made centrally and distributed to the branches. However, sales are made both at the central store and the branches. The operating system of the division is shown schematically. During the year APRIL 1990- MARCH 1991, the division made sales of RS 53.9 LAKHS, OUT OF which two thirds was from the central stores and the remaining from the branches. The four branches at HUBLI, DAVANGERE, BIJAPUR, and GANGAVATHI took a lion’s share of branch sales. The sales from other four branches were around rupees five lakhs. From the inventory valuation it is seen that as on march 31, 1990 the central store had an inventory worth RS 46.82 lakhs. The inventory in the four major branches was RS 12.35 LAKHS. The total stocks of spares the entire division held was worth RS 59.17 LAKHS. IN 1990, MAGI corporation was diversifying its field of business and a section dealing. In veterinary drugs was started in the central stores complex towards the end of that Year. JAYADEV, who took over as manager of the spare parts division in 1991, was of the Opinion that considering the scale of transactions, the division was carrying far too high an inventory. This was mainly because old and rule thumb methods of stock control were being followed and there was urgent need of introducing modern Scientific methods of inventory control for reducing stocking costs. He felt that good techniques of forecasting the demand of spares have also to be Installed to promote more effective service to the agricultural tractor users. He also felt that the best control of the system could be obtained through computerization, as the number of items were fast increasing and the market was rapidly expanding. Prior to Jayadev’s taking over of the division, a preliminary study was instituted by the organization, to determine the feasibility of computerizing its operations. The study gave an overview of the systems, and also the relevant costs that would be incurred in case Magi decided to computerize its spare parts division’s operations. The expenses estimated, were a one time charge of Rs. 28,000, quarterly charges of Rs. 10,000, monthly charges of Rs. 5140 and annual charges of Rs. 2400. These include costs of data preparation, data entry into floppy disks and stationery. The information obtained from the system included stock positions (both at the central stores and at the branches), shortage lists and usage lists.



Indianstate SYSTEM Other EXISTING Foreign suppliers agros ers suppli

Customer C tomer Cusustomer Central central stores is shown in fig. 6.2. At each Other state Customer The present organization of the agros of the branches there is one stores sales assistant and one helper. In some branches, where transactions are more, the number of helpers will be two, the sales assistant’s job is similar to that of the one in the central stores. The paper work flow is as follows. Whenever there is a shortage of an item, the store keeper makes out an indent and passes it on to the purchase section, which prepares five copies of the purchase order. After the signature of the manager, they are distributed as shown in the diagram. When the material against the purchase order is received by the stores, three copies of the stock receipt note are prepared. One copy is used for the ledger entry in the store accounting section, one for payment and the third for the records of the store keeper. The transaction between the central store and the branch stores is controlled through a stock transfer note (STN), which is prepared in quadruplicate every time a transaction is made. Two copies are sent to the branch along with the spares, one is used for ledger entry and the other as authority for stock move. Whenever a sale is made in the counter, a cash bill is prepared. Four copies of the bill are prepared by the sales assistant. The last copy is left in the cash book itself. The remaining three copies are first sent to the accounts. On the payment of cash by the customer, a seal indicating that the cash has been received, is put on all three copies and one is filed there.

Branch 1 Branch 3 2

Subsequently, this is passed on to the stories accounting section for ledger entry. The remaining two copies are passed on to the store keeper who puts the seal indicating that the item has been delivered, and files one copy. This is used in the bin card entry. The original copy of the cash bill is given to the customer along with the store item. Present organization chart of Magi.

Purchase & sales engineer (Development, imports and sales analysis)

Stores assistant (Spares) miscellaneous)

Purchase assistant (Iron and steel hand tools &

Sales counter Outward section

Store keeper

Stores accountant

Whenever there is a bulk sale, the cash bill is replaced by an ‘invoice’ or ‘debit note’. When the bulk sale is to the Government state units, a ‘debit note’ is used. Otherwise ‘invoice’ is used. The flow of information is exactly like that in the case of cash bills. When the bulk sale is to an outside private party, a “delivery note” is made in five copies. The original together with the invoice copy, is sent to the customer along with the material which is sent in a commercial transport. This enables the customer to make payment through a bank. The second copy along with invoice copy is filed in the office file and the remaining three copies are left in the book itself. The branches also send in information every week in the form of copies of cash bills, tally sheet and a copy of the bank deposit note. At the branches, at the end of each day the money received from sales is deposited at the bank. The copy of the bank deposit note gives the amount deposited. This, along with the copies of cash bills are used for the purpose of cross checking. To make this

checking easier a ‘tally sheet’ is prepared, in which the date, cash bill number, and amount of each bill with details of sales tax, octroi etc. are given. Only the cash bill can give the details regarding the part number and quantity sold each day. Here again, four copies of the cash bill are prepared – the original is given to the customer, the first and the third copies are filed there and the second copy is sent to the central stores. INVENTORY CONTROL PROCEDRES The organization keeps stores ledgers and bin cards at the central stores. The store keepers, while issuing materials, enter the quantity issued in the bin cards and, so, the day to day status if inventory is known from these bin cards. Copies of documents like cash bills, stock transfer notes etc. are used by the stores accounting group for the documentation in the ledgers. The bin cards are used to initiate purchase. As soon as the stock of an item reaches a certain level, the stores attender intimates the stores assistant for necessary action. This level is fixed based on the experience and subjective judgment of the store keeper. It is not the practice in the division to prescribe safety stocks for the items. Further, there is generally a time lag between the physical transaction and the entries in the stores accounting ledger. Hence, bin cards are generally more reliable in giving the day to day stock levels of items. After a few months of taking over charge of division, Jayadev called in a consultant, Mohan, who was an engineer with an MB and entrusted him with the following tasks. 1. 2. To suggest inventory control procedures to bring down the inventory costs. To streamline the procedures and to suggest whether it was feasible to computerize the information system and if so, to provide an outline of the system so that it could be taken up with the top management for installation.

Mohan studied the operations of the spare parts division, held discussions with the manager, sales engineer, accountant and store keepers. He divided his recommendations into three areas, i.e., procedural improvements, inventory control, and forecasting and computerization. In his opinion, the amount of work, taking into consideration the expanding business, was more than could be well managed by the existing strength of personnel. For stricter control of operations to be accomplished, some reorganization was recommended. The proposed organization structure is shown in fig. 6.3. However, he felt that a sales engineer and another in-charge of stores are required for better control.

Proposed organization chart Manager

Purchase engineer (Development & imports)

Sales engineer 1. Depot inspection 2. Booking dealers in and out of state 3. Visit to other agros etc. 4. New lines of business

Stores Purchase assistant Assistant (Spares purchases spares miscellaneous) Receiving & pricing)

Purchase assistant (Iron & steel)

Purchase assistant (Hand tools &

Store Keeping

Store accountant Outward

Sales counter section

Introduction of stores assistant could bring in good control of physical inventories and the purchase assistant could concentrate more on purchasing, pricing etc. Analysis of the paper work revealed that some of the clerical work could be reduced. For example, of the two copies of the purchase order sent to the vendor, one is to be used by him for acknowledgement. But in practice this did not seem to be happening and hence, in effect, an extra copy of the purchase order needed to be sent. For the acknowledgment, a small slip could be sent along with the purchase order which could serve as an aid in knowing the expected lead time. The slip should contain the vendor’s name, purchase order number and date and a provision for the vendor to fill in the expected date of supply.

In the case of the delivery note, five copies were prepared. But the organization itself felt that only four were needed. Hence, subsequently only four copies were recommended to be prepared. As indicated earlier, tally sheets were prepared at the branches. the management felt that, sales assistants at the branches should not be taxed to do any clerical work which would interrupt his interest in sales expect perhaps for bill preparation. Hence the preparation of the tally sheet could be abolished. Moreover, the cross check regarding the amount deposited and amount sold could be done by making use of the cash bill copies and a copy of the bank deposit note. At the branches, four copies of cash bills were prepared; but in practice only three of these were used. Hence, one copy could be abolished. So, separate ‘cash bill books’ were recommended to be prepared for the use at the branches. when three copies were prepared, the original had to be given to the central stores and the last on could be used for the ledger entries at the branches. since the first carbon copy was going to the stores, it would be clear enough for further use at the central stores. For example, if the central stores wanted to know about the sale of a particular item, its price as charged by the branches, and the total amount, all these could be obtained from the cash bill copies. For inventory control, a system which works on scientific principles, was recommended to be introduced. This system was to have re-order levels, maximum stock – which were found out on the basis of demand and supply patterns of the items. Moreover, strictor control could be achieved by concentrating only on a few items which might be the A and B class items according to a suitable classification. For total material planning some forecasting techniques based on the ‘seasonality index’ or on the increase in the number of tractors per year or on both could be made use of. To develop selectiv4e inventory control, Mohan made a list of all items categorized as general items. He also determined their annual demand and unit costs for the year 1972-73, and using this he made the classification as shown in Table 6.1.
Distribution of percentage number of items and percentage value of consumption

Group number 1. 2. 3.

Consumption Number value range (Rs) of items 0 to 2000 2001 to 10000 above 10000 456 85 28

Total value Percent No. of consump- of items -tion 144,154.03 80 373,363.24 15 1,136,574.39 5

Percent value of consump-tion 9 22.5 68.5

The number of items included as general items was 569. The total consumption value was Rs. 1,654,091.67. Out of this, the top 28 items accounted for the total consumption value of Rs. 1,136,574.40. The next 85 items

accounted for Rs. 373,363.24. Hence totally 113 items accounted for Rs. 1,509,937.64. The remaining 456 items accounted for the consumption value of Rs. 144,154.03. Table 6.1 indicated different classifications and the value ranges for classification. Mohan suggested a fixed interval recorder system for the A and B items giving the following reason – “fixed quantity recorded system is cumbersome and expensive, since the size of the order is predetermined, it does not allow for absorbing variations in usage and this has to be taken care of by safety stocks. On the other hand, in the fixed interval system, review is less expensive, periodic and the order quantity can be adjusted to absorb the variation in storage.” He further stated that the difference in the systems for A and B items would be the length of review period. He showed, as an example for an item, the following calculation: Nozzle- B item-Lead time for procurement Review period length EOQ Annual usage Maximum demand during lead time Safety stock = 2 months = 2 months = 50 units = 270 units = 175 units = 175 units

T/2, the average usage during lead time = Vd/2 = 270/12 X 2/2 = 25; Max level = 175 + 50 – 25 =200. Hence when review is done, if the available inventory is less than 175, place an order an order to bring it to level of 200 (taking into consideration both inventory on hand and on order). For C items, a two-bin policy was suggested. The amount of stock in the second bin being a little more than demand during lead time. In order that purchase planning and stock planning could be done systematically, Mohan suggested the use of demand forecasting for all items. However, since the division was a trading organization he felt that the methods should be so selected as to help in budgeting the annual requirements rather than going in for sophisticated forecasting methods. He suggested two approaches, one based on the number of tractors covered by Magi, and the second based on the seasonal variation of sales. Since the sale of spares depended upon the number of tractors in the state, a knowledge of previous sales and of the increase in the number of tractors would be helpful in projecting the future sales. Detailed information could be obtained if this analysis was done classwise (either A class items or B class items, or for any other classification of components). The reasoning behind this was simple. If there was an increase of X percent in A and Y percent in B class of items for an increase in N tractors (in number)during the previous year, an increase of M tractors in the current year would end up in a sale of (X x M/N) percent of A class (Y x M/N) percent of B class items. Mohan however said that

this was a rough estimation, but in total this would be quite helpful for budgeting purpose and financial control. The other method suggested by the consultant was because the sales of spare parts depended upon the time in which overhauling of tractors was done. This in turn largely depended upon the monsoon. As there were many vagaries in the monsoon season, the sales would not only vary from month to month in the same year but also over the years for the same month. Hence, a tool which takes care of the seasonal variation in demand would be highly useful. It was also noticed from the records that the post-monsoon months were the peak sales periods. Mohan collected the sales data for the years 1989 and 1990 for a few items and developed figures similar to the ones shown in Table 6.2 and computed the forecast for the months of June, July and August for 1991, using the sales history of March, April and May. To account for the trend factor as well the random factor, an average of the deseasonalized demand was taken. This was considered the forecasting base. In a similar manner could be forecast and inventory planning could be done for any period (Table 6.3 and 6.4). Seasonal variation of demand during 1989-1990 (6.2) Jan. Feb. 1989 1990 Index 1.0 March April May June July 69 71 76 81 85 70 70 80 80 90 1.4 1.4 1.6 1.6 1.8 Aug. Sept. Oct. Nov. Dec. 91 101 97 84 56 51 90 100 100 90 60 0 1.8 2 2 1.8 1.2 1.0

46 50

De-seaonalized Demand(1991) (6.3) Month Deseasonalized (units) March 1991 April 1991 May 1991 Demand forecast Quantities Month June 1991 July 1991 Aug. 1991 BaseX seasonal factor 52.3 X 1.8 52.3 X 2 52.3 X 2 Forecast 94 104 104 82 84 96 1.6 1.6 1.8 82/1.6=51.2 84/1.6=52.5 96/1.8=53.3 Observed demand (units) Seasonal factor demand

FEASIBILITY OF COMPUTRIZATION As a next step, Mohan collected all pertinent information of the operation of the operations in order to determine the feasibility of computerization and succinctly put them in a condensed from in Table 6.5 Date form Information Required
Quantity transferred

Final statement received
Present stock level based on opening stock

control generated
Check on transfer of items-inter Warehouse or House or vice-


Delivery note stock Transfer for note wareversa. Cash bills branches and Stock receipt note positions

Quantity sold price

Check on price Income

Incoming quantity opening stock-outs

Stock positions,

Review of Provided

Cash bill central stores decisions order.

Quantity sold

Order Expected Material

control and Planning Purchase order control and Acknowledgement Expected quantity and lead time Available inventory in future Budgetory planning.

Nearly 1000 to 1200 cash bills were received per month from central stores and branches. On an average there were 200 items in transaction everyday. Thirty purchase orders, 30 stores receipt notes and 60 STNS were prepared every month and each STN had five to six items detailed in it. Mohan was of the opinion that since the transactions were mostly routine, much of the manual work could be replaced by the data processing and increasing the number of employees could be avoided. He made a system flow chart showing various input and outputs (fig. 6.4)


Five runs were envisaged: Run-1: From the purchase order data, the purchase order output, is produced. Run-2: Using the transaction tape and master tape [master tape is the store ledger] store ledger for the period showing the transactions is obtained and the inventory status of each item at the central stores and branches is obtained. Run-3: The updated master tape is used to generate a storage list and re-order list after comparing the status of inventory with re-order levels. This with the output of run-1 will enable order placing. Run-4: Gives the usage list making the transaction tape. The forecasting techniques can be used here for future stock planning. Run-5: Gives the financial details using cash bills (as cards). This output gives details about profit, sales proceeds etc. After the study was concluded, Mohan presented his findings and recommendations to the staff of the spare parts division of Magi corporation. Sales engineer, Shanmugam, raised objections regarding the inventory control of A and B items. He said that there were far too many items involved in the calculation of order quantities and if items other than general items were included the task would become too difficulty. A few storekeepers raised a point that since there ere many items which were imported and the lead times were long for procurement, the suggested periodic review system would not work satisfactorily and Dev expressed his opinion saying that while a commendable job has been done regarding the procedures, control and computerization he wished one could get a little bit more from the angle of policies. The accountant, however, opined that if computerization was finally decided by management, as no reduction in staff was suggested, it would add to the cost. Mohan replied that when the system stabilized it could prove, with increased business, that saving in the inventory cost would outweigh the computerization costs.

Check list run

Financials details cash bills

Stores ledger

Fif!. 6.4

Svstem flow rh"rt

Financial report

1. How do you evaluate the recommendation of Mohan in respect of inventory control of A and B items? Do you agree with his views? If not why? Has overlooked any vital aspect of inventory management?

2. 3. 4.

Should he have taken into consideration that Magi also undertakes maintenance jobs of tractors? Does such a consideration alter the management of spare parts? Do you agree with the view of manager Dev regarding policies? If you were asked to suggest policy measures what would you do? How would you use the information available? Comment on the computerization scheme proposed. If instead of a punched card system a desk top system were used, how could you handle the computerization? Support your answer with system flow charts.

MRP) Dear students, with this I would like to conclude the today’s tutorial. I hope it has been a great learning process for all of you and that this exercise has resulted in immense value addition. O.K. Then. See you all in the next lecture. Take care. Bye.

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