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Materials Management

Unit-IV

INDUSTRIAL ENGINEERING
MEC-441

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Materials Management
• It is defined as an organizational concept, which has
the authority and responsibility of all activities,
concerned with the flow of materials in the
organization.
• It is concerned with planning, organizing and
controlling the flow of materials from their initial
purchase through internal operations to the service
point through distribution.
• Material management is a scientific technique,
concerned with Planning, Organizing &Control of
flow of materials, from their initial purchase to
destination. 2
Aims of Materials Management
To get:
1. The Right quality

2. Right quantity of supplies

3. At the Right time

4. At the Right place

5. For the Right cost


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Purpose of Materials
Management
• To gain economy in purchasing
• To satisfy the demand during period of
replenishment
• To carry reserve stock to avoid stock out
• To stabilize fluctuations in consumption
• To provide reasonable level of client
services

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Objectives
Primary Secondary
•Right price
•High turnover •Forecasting
•Low procurement •Inter-departmental
& storage cost harmony
•Continuity of supply •Product improvement
•Consistency in quality •Standardization
•Good supplier relations •Make or buy decision
•Development of •New materials & products
personnel •Favorable reciprocal
•Good information relationships
system 5
Advantages
• Material cost can be lowered ( Sales price can be
brought down to a reasonable level)
• Controlling of indirect cost (such as materials
movement)
• Risk of inventory loss minimized (theft, pilferage )
• Reduction in loss of time of direct labor
• Cost of material used in different department
ascertained
• Control of manufacturing cycle
• Material congestion in storage places avoided
• Improvement in delivery of the product
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Materials Requirement Planning
- encompasses the identifying, quantifying
and scheduling the acquisition of materials
and equipment.
- necessary function in any organization as
inventory of materials involved about 60%
of the total investment of the organization

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MRP Inputs
• Master Production Schedule
• Bill Of Material
• Inventory Levels

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Master Production Schedule
Time-phased plan specifying how many and when
the firm plans to build each end item

Aggregate Plan
(Product Groups)

MPS
(Specific End Items)

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Bill of Materials
• Shows all the assemblies, subassemblies,
components, and raw materials required to
produce an item
• Shows way a finished product or parent item is
put together from individual components
• Parent item shown at highest level or level zero
• Parts that go into parent item are called level 1
components and so on
• Production planners explode BOM for level
zero item to determine the number, due dates,
and order dates of subcomponents 11
Product Structure Tree
• Visual depiction of the requirements in a bill of
materials, where all components are listed by
levels.

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Example 1
Level Chair
0 Leg Back
1 Assembly Assembly
Seat

2 Legs (4) Cross Side Cross Back


bar Rails (2) bar Supports
3 (1)

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Example - 2

Bicycle(1)
P/N 1000

Handle Bars (1) Frame Assembly (1)


P/N 1001 P/N 1002

Wheels (2) Frame (1)


P/N 1003 P/N 1004

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Inventory Records
One of the three primary inputs of MRP
Includes information on the inventory status of each
item by time period
Gross requirements
Scheduled receipts
Amount on hand
Lead times
Lot sizes
And more....
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MRP Terminology
Gross requirements
Total expected demand
Scheduled receipts
Open orders scheduled to arrive
Projected on hand
Expected inventory on hand at the beginning of
each time period
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Net requirements
 Actual amount needed in each time period
 Planned-order receipts
 Quantity expected to be received at the beginning of
the period
Planned-order releases
 Planned amount to be ordered in each time period

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MRP Processing
• Determine the gross requirements of a
finished products
• Determine the net requirements and when
orders will be released for fabrication or
subassembly
• Net requirements = Total requirements –
Available inventory
• Net requirements = (Gross requirements +
Allocations) – (on hand) – Scheduled
receipts 18
Schematics of MRP

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MRP Outputs
Primary Reports
• Planned Orders – schedule indicating the
amount and timing of future orders
• Order Releases – Authorization for the execution
of planned orders
• Changes – revisions of due dates or order
quantities, or cancellation of orders

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MRP Outputs
Secondary Reports
• Performance-control reports – Evaluation of
system operation, including deviations from
plans and cost information
• Planning reports – Data useful for assessing
future material requirements
• Exception Reports – Data on major
discrepancies encountered

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Other Considerations
• Safety Stock
• Lot sizing
– Lot-for-lot ordering
– Economic order quantity
– Fixed-period ordering
– Part-period model

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Limitations of MRP
• High costs and technical complexities in implementation.
• In addition, organizations, which use an MRP system
need to spend considerable effort on installing necessary
equipment (computers), training personnel, modifying
the software to serve their specific needs, validating,
testing, and eliminating possible errors, and maintaining
the software.
• The time required for planning and implementing an
MRP system is generally very long.
• Data entry and file maintenance requires considerable
inputs in the form of training and education of the
personnel.
• Dependence on forecast values and estimated lead-time 23
can sometimes be misleading.
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Practice Numerical
• One unit of product A is made up of two units of
B and four units of C. B is made of two units of D
and three units of E. C is made up of three units
of D and two units of F.
• (a) Draw a product structure tree.
• (b) A,C,D and E have lead times of one week
and B and F have lead times of 2 weeks. If 100
units of A are required in week 5, develop the
material requirement plan specifying when items
are to be ordered and received. There are no
units of inventory on –hand. 29
MRP Evolution
MRP
# Schedule Materials

Closed Loop MRP


• Schedules Materials
• Incorporate Feed Back

MRP-II
• Schedule & Purchase Material
• Coordinate with Manufacturing Resources

ERP
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Closed Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning

No
Realistic? Feedback
Feedback
Yes
Execute:
Capacity Plans
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Material Plans
MRP Benefits
• Low levels of inventories and reduction in
manufacturing lead time
• Ability to track material requirements hence
reducing shortages
• Ability to evaluate capacity requirements
• Means of allocating production time

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Manufacturing Resource
Planning (MRP-II)
• Goal: Plan and monitor all resources of a
manufacturing firm (closed loop):
– manufacturing
– marketing
– finance
– engineering
• Simulate the manufacturing system

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Characteristics

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Market Master
Finance Manufacturing production schedule
Demand

Adjust master schedule


Marketing

Production
plan MRP

Rough-cut Capacity
capacity planning planning
Adjust
production plan

Yes No Requirements No Yes


Problems? schedules Problems?

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Advantages

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Inventory
• Inventory or stock is the goods and materials
that a business holds for the ultimate goal of
sale (or repair).
• Inventory Control means stocking adequate
number and kind of stores, so that the materials
are available whenever required and wherever
required. Scientific inventory control results in
optimal balance

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Types of Inventory
• Raw materials & purchased parts
• Partially completed goods called work in progress
• Finished-goods inventories (manufacturing
firms) or merchandise (retail stores)
• Replacement parts, tools, & supplies
• Goods-in-transit to warehouses or customers

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Functions of Inventory
• To meet anticipated demand
• To smooth production requirements
• To decouple operations
• To protect against stock-outs
• To take advantage of order cycles
• To help hedge against price increases
• To permit operations
• To take advantage of quantity discounts

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Objective of Inventory Control
• To meet unforeseen future demand due to
variation in forecast figures and actual figures.
• To average out demand fluctuations due to
seasonal or cyclic variations.
• To meet the customer requirement timely,
effectively, efficiently, smoothly and satisfactorily.
• To smoothen the production process.
• To facilitate intermittent production of several
products on the same facility.
• To gain economy of production or purchase in
lots.
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• To reduce loss due to changes in prices of
inventory items.
• To meet the time lag for transportation of goods.
• To meet the technological constraints of
production/process.
• To balance various costs of inventory such as
order cost or set up cost and inventory carrying
cost.
• To balance the stock out cost/opportunity cost
due to loss of sales against the costs of inventory.
• To minimize losses due to deterioration,
obsolescence, damage, pilferage etc.

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Inventory Control Terminology
• Demand: It is number of items required per period
• Lead Time: It is the time between placing an order
and its receipt in stock
• Quantity Discount: It is an allowance granted by the
vender to the purchaser of the materials for encouraging
large size orders
• Safety Stock: It is the minimum stock level of the
material below which the actual stock should not be
allowed to fall
• Lot Size: The amount of material procured or quantity
produced during one production run by an enterprise is
known as lot size
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• Minimum Level – It is the minimum stock to be
maintained for smooth production.
• Maximum Level – It is the level of stock,
beyond which a firm should not maintain the
stock.
• Reorder Level – The stock level at which an
order should be placed.
• Safety Stock– Stock for usage at normal rate
during the extension of lead time.
• Reserve Stock - Excess usage requirement
during normal lead time.
• Buffer Stock – Normal Lead time Consumption..43
Inventory Turnover
Inventory turnover is the ratio of average
cost of goods sold to average inventory
investment.

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Effective Inventory Management
• A system to keep track of inventory
• A reliable forecast of demand
• Knowledge of lead times
• Reasonable estimates of
– Holding costs
– Ordering costs
– Shortage costs
• A classification system
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Factors Affecting Inventory
Control
• Type of product
• Type of manufacture
• Volume of production

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Benefits
• Ensures an adequate supply of materials
• Minimizes inventory costs
• Facilitates purchasing economies
• Eliminates duplication in ordering
• Better utilization of available stocks
• Provides a check against the loss of materials
• Facilitates cost accounting activities
• Enables management in cost comparison
• Locates & disposes inactive & obsolete store
items
• Consistent & reliable basis for financial
statements 47
Accounting for Inventory
• Inventory value account for varying proportions
of raw materials, work in process parts,
components or finished products.
• In continuous production/ mass production
inventory for raw materials and finished product
is high and that of WIP parts is less.
• In batch production/ Job shop production
inventory for raw material & finished products is
less and WIP inventory is high.

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Distribution of Inventory
Account

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Inventory Costs
• Ordering (purchasing) costs
• Inventory carrying (holding) costs
• Out of stock/shortage costs
• Other costs

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Ordering Cost
• It is the cost of ordering the item and securing its
supply.
• It Includes-
 Expenses from raising the indent
 Purchase requisition by user department till
the execution of order
 Receipt and inspection of material

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Inventory Carrying Cost
• Costs incurred for holding the volume of
inventory and measured as a percentage of unit
cost of an item.
• It includes-
 Capital cost
 Obsolescence cost
 Deterioration cost
 Taxes on inventory
 Insurance cost
 Storage & handling cost 52
Out of Stock Cost
• It is the loss which occurs or which may occur
due to non availability of material.
• It includes-
 Break down/delay in production
 Back ordering
 Lost sales
 Loss of service to customers, loss of
goodwill, loss due to lagging behind the
competitors, etc.
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Other Costs
• Capacity Costs
 Over-time payments
 Lay-offs & idle time
• Set-up Costs
 Machine set-up
 Start-up scrap generated from getting a
production run started
• Over-stocking Costs

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Inventory Control Models
(i) Deterministic Models : The deterministic
models are built on the assumption that
there is no uncertainty associated with
demand and replenishment of inventories.
(ii) Probabilistic Models : The probabilistic
models take cognizance of the fact that
there is always some degree of
uncertainty associated with the demand
pattern and lead time of inventories.
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Inventory Models
• EOQ (Economic Order Quantity)
EOQ or Fixed Order Quantity system is the
technique of ordering materials whenever stock
reaches the reorder point.
Economic order quality deals when the cost of
procurement and handling of inventory are at
optimum level and total cost is minimum.
In this technique, the order quantity is larger than a
single period’s requirement so that ordering costs &
holding costs balance out.
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Inventory Cost Relationships

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Assumptions
• Demand for the product is constant
• Lead time is constant
• Price per unit is constant
• Inventory carrying cost is based on
average inventory
• Ordering costs are constant per order
• All demands for the product will be
satisfied (no back orders)
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Weaknesses
• Erratic usages
• Faulty basic information
• Costly calculations
• No formula is substitute for common sense
• EOQ ordering must be tempered with
judgment

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Basic EOQ Model

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• Model 1: derivation of Harris formula for
instantaneous supply , continuous consumption
and zero buffer stock
• Notations:
– Q = Economic order quantity EOQ
– D = Annual demand or consumption of input materials
or yearly usage of items
– C =Unit cost
– P = Procurement cost or ordering cost per quantity
– i = rate of interest charged per unit per year
– H = Inventory holding or carrying cost

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• Model II: Economic order quantity or
Economic lot size with reserve stock:
• Where R is Reserve stock and R=fQ

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Model III: EOQ when there is shortage
Where, C1 = Penalty per unit shortage cost per
unit time

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• Model IV: Economic lot size when supply is
continuous
• Where;
– the rate of inventory build up = ( S - p ),
– Rate of supply = S
– Rate of consumption = p

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Example

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Always Better Control (ABC)
Analysis
• This technique divides inventory into three
categories A, B & C based on their annual
consumption value.
• It is also known as Selective Inventory Control
Method (SIM)
• This method is a means of categorizing
inventory items according to the potential
amount to be controlled.
• ABC analysis has universal application for fields
requiring selective control.
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Procedure
• Make the list of all items of inventory.
• Determine the annual volume of usage & money value of
each item.
• Multiply each item’s annual volume by its rupee value.
• Compute each item’s percentage of the total inventory in
terms of annual usage in rupees.
• Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
• Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
• The next 70% of all items with the lowest rupee
percentages are “C” items. 70
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Advantages
• Helps to exercise selective control
• Gives rewarding results quickly
• Helps to point out obsolete stocks easily.
• In case of “A” items careful attention can be paid at
every step such as estimate of requirements,
purchase, safety stock, receipts, inspections, issues,
etc. & close control is maintained.
• In case of “C” items, recording & follow up, etc. may
be dispensed with or combined.
• Helps better planning of inventory control
• Provides sound basis for allocation of funds &
human resources. 72
Disadvantages
• Proper standardization & codification of
inventory items needed.
• Considers only money value of items & neglects
the importance of items for the production
process or assembly or functioning.
• Periodic review becomes difficult if only ABC
analysis is recalled.
• When other important factors make it obligatory
to concentrate on “C” items more, the purpose of
ABC analysis is defeated.
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VED Classification
• VED: Vital, Essential & Desirable classification
• VED classification is based on the criticality of
the inventories.
• Vital items – Its shortage may cause havoc &
stop the work in organization. They are stocked
adequately to ensure smooth operation.
• Essential items - Here, reasonable risk can be
taken. If not available, the plant does not stop;
but the efficiency of operations is adversely
affected due to expediting expenses.
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VED Classification
• They should be sufficiently stocked to ensure
regular flow of work.
• Desirable items – Its non availability does not
stop the work because they can be easily
purchased from the market as & when needed.
They may be stocked very low or not stocked.
• It is useful in capital intensive industries,
transport industries, etc.
• VED analysis can be better used with ABC
analysis in the following pattern:
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FSN Analysis
• FSN: Fast moving, slow moving & non moving
• Classification is based on the pattern of issues
from stores & is useful in controlling
obsolescence.
• Date of receipt or last date of issue, whichever is
later, is taken to determine the no. of months
which have lapsed since the last transaction.
• The items are usually grouped in periods of 12
months.

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• It helps to avoid investments in non moving or
slow items. It is also useful in facilitating timely
control.
• For analysis, the issues of items in past two or
three years are considered.
• If there are no issues of an item during the
period, it is “N” item.
• Then up to certain limit, say 10-15 issues in the
period, the item is “S” item
• The items exceeding such limit of no. of issues
during the period are “F” items.
• The period of consideration & the limiting
number of issues vary from organization to
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organization.
SDE Analysis

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HML Analysis
• The items under this analysis are classified into
High, Medium and Low price according to their
unit price .To Classify the items are listed
according to the descending order of their unit
price .The cutoff is then fixed for each category.
• For e.g. :An item above the price of Rs.1000 can
be classified into ‘H’ Category .An item in
between the price range of Rs.150 to Rs. 1000
can be classified into ‘M’ Category and
below Rs.150 can be classified into ‘L ‘
Category . 80
SOS Analysis
• SOS analysis is based on seasonality of items
and it classifies all the items into two categories
:‘Seasonal ‘ And ‘Off seasonal ‘
– The analysis helps in:
• Identifying items that are available only during a
limited period of the year .For e.g. Raw mangoes
are only available only during a summers
• Identifying items that are seasonal but available
throughout the year however their costs in
offseason are relatively high.
• Non Seasonal items
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XYZ Analysis
• The XYZ analysis is a way to classify inventory items
according to variability of their demand.
– X – Very little variation: X items are characterised by
steady turnover over time. Future demand can be
reliably forecast.
– Y – Some variation: Although demand for Y items is not
steady, variability in demand can be predicted to an
extent. This is usually because demand fluctuations are
caused by known factors, such as seasonality, product
lifecycles, competitor action or economic factors. It's
more difficult to forecast demand accurately.
– Z – The most variation: Demand for Z items can
fluctuate strongly or occur sporadically. There is no trend
or predictable causal factors, making reliable demand
forecasting impossible. 82
Inventory Turnover Ratio
Inventory can also be managed by using
accounting ratios like Inventory Turnover Ratio.
Inventory ratio establishes relationship between
average inventory and cost of inventory consumed
or sold during the particular period.
This is calculated with the help of the following
formula:

Inventory Turnover Ratio =


Cost of Good Consumed or Sold during the year
Average Inventory during the year. 83
A comparison of current year’s inventory ratio with
those of previous years will unfold the following
points relating to inventories:

Fast-Moving Items: This is indicated by a high


inventory ratio. This also means that such items of
inventory enjoy high demand. Obviously, in order
to have smooth production, adequate inventories
of these items should be maintained. Otherwise,
both production and sales will be adversely
affected through uninterrupted supply of these
items.
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Slow-Moving Items: That some items are slowly
moving is indicated by a low turnover ratio. These
items are, therefore, needed to be maintained at a
minimum level.

Dormant or Obsolete Items: These refer to items


having no demand. These should be disposed of
as early as possible to curb further losses caused
by them

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Safety Stock
• Safety stock (also called buffer stock) is a term
used by logisticians to describe a level of extra
stock that is maintained to mitigate risk of
stockouts due to uncertainties in supply and
demand
• Safety stock is an additional quantity of an item
held in the inventory in order to reduce the risk
that the item will be out of stock, safety stock act
as a buffer stock in case the sales are greater
than planned and or the supplier is unable to
deliver the additional units at the expected time.
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• The less accurate the forecast, the more safety
stock is required to ensure a given level of
service.
• A common strategy is to try and reduce the level
of safety stock to help keep inventory costs low
once the product demand becomes more
predictable.
• This can be extremely important for companies
with a smaller financial cushion or those trying to
run on lean manufacturing, which is aimed
towards eliminating waste throughout the
production process.

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Reasons of Keeping Safety
Stock
• Safety stocks are mainly used in a “Make To
Stock” manufacturing strategy.
• This strategy is employed when the lead time of
manufacturing is too long to satisfy the customer
demand at the right cost/quality/waiting time.
• The main goal of safety stocks is to absorb the
variability of the customer demand.
• Creating a safety stock will also prevent stock-
outs from other variations, like an upward trend
in customer demand.
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• Safety stock is used as a buffer to protect
organization from stockouts caused by
inaccurate planning or poor schedule adherence
by suppliers
• Various methods exist to reduce safety stock,
these include better use of technology,
increased collaboration with suppliers, and more
accurate forecasting
• An Enterprise Resource Planning system (ERP
system) can also help an organization reduce its
level of safety stock. Most ERP systems provide
a type of Production Planning module

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Inventory Policy
• The size of the safety stock depends on the type
of inventory policy that is in effect.
• An inventory node is supplied from a "source"
which fulfills orders for the considered product
after a certain replenishment lead time.
• In a periodic inventory policy the inventory
level is checked periodically (such as once a
month) and an order is placed at that time as to
meet the expected demand until next order.
• In this case, the safety stock is calculated
considering the demand and supply variability
risks during this period plus the replenishment
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lead time.
• If the inventory policy is continuous policy
(such as an Order point-Order Quantity policy or
an Order Point-Order Up To policy) the inventory
level is continuously monitored and orders are
placed with freedom of time.
• In this case, safety stock is calculated
considering the risk of only the replenishment
lead time.
• If applied correctly, continuous inventory policies
can lead to smaller safety stock whilst ensuring
higher service levels, in line with lean processes
and more efficient overall business
management. 91
Example
• Daily Demand: 20 units
• Lead Time: 10 days
• S.D. of the lead time demand: 50 units
• Service Level: 90%

Determine:
 Safety Stock
 Reorder Point
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Solution
• Step 1: determine z
From appendix B : z=1.28

• Step 2: determine safety stock


SS = 1.28X50 = 64 units

• Step 3: determine reorder point


ROP = nL + SS = 20X10 + 64 = 264 units

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Appendix B

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Material Handling
Materials handling is the art and science of
moving, packing and storing of substances
in any form.

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Importance
• Function of production control
• Concerned with scheduling of production control
• Material Handling adds value to product cost
• Material Handling increases effectiveness of in
plant layout by reducing the cost

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Objectives
• To Lowers unit materials handling cost
• To reduce manufacturing cycle time
• To provide better control of the flow of materials
• To provide better working conditions
• To provide Contribution for better quality by
avoiding damages to products
• To Increase storage capacity
• To provide higher productivity at lower
manufacturing costs
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Principles
• Material should be moved as little as possible
• Reduction in time by using shortest routes and
mechanical material handling equipment
• The material movement should be in lots rather than
in individual units
• Design of material handling equipment should be
such that it can increase the effectiveness
• Gravity should be used
• Rehandling and back tracking of materials should be
avoided
• Periodically Repairing , Maintenance & Checkup of
existing material handling equipments 98
Factors affecting
selection of Material
Handling Equipment

Capabilities
Human of the
Production Elements handling
Problem Involved equipment
available
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Volume of
production
to be
mantained

Production
Problem

Class of Layout of
material to plant and
be building
handled facilities 100
Flexibility

Load
Adaptability
Capacity

Power Speed
Equipment
Factors
Ease of Space
maintenance Requirement

Supervision
Cost Required

Environment
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Human
Factors

Capabilities
Safety of
of
personnel
manpower
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Selection of Material Handling
Equipment

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Types of Material Handling
Systems
1. Equipments oriented 2. Material Oriented
systems Systems
a) Convey or Systems a) Unit handling system
b) Tractor transfer system b) Bulk handling system
c) Fork lift truck c) Liquid handling system
d) Industrial truck system
e) Underground system

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3. Methods oriented 4. Function oriented
system system
a) Manual systems a) Transportation systems
b) Automated systems b) Conveying systems
c) Job shop handling c) Transferring systems
system d) Elevating systems
d) Mass production
system

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Material Handling Equipments
1. Conveyers
2. Cranes, Elevators and Hoists
3. Industrial Trucks
4. Auxiliary Equipments

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1. Conveyors-
• Gravity or powered devices
• Used for moving loads from one point to point
over fixed paths.
Belt Conveyor:
Motor driven, belt usually made of metal fabric

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Chain Conveyor:
Motor driven chain that drags material along a
metal side base

Roller Conveyor:
Boxes, Large parts or units load roll on the top of a
series of rollers mounted on a rigid frame.

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Pneumatic Conveyors:
High volume of air flows through a tube carrying
material along with air flow.

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2. Cranes, Elevators and Hoists –
These are overhead devices used for moving
varying loads intermittently between points within
an area.
Cranes:
Devices mounted on overhead rail or ground
wheels or rails. They lift, swing and transport large
and heavy materials.

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Elevators:
Types of cranes that lift materials usually between
floors or buildings.

Hoists:
Move vertically or horizontally. May be air hoist,
electric hoist or chain hoist.

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3. Industrial Trucks –
May be electric, diesel, gasolene or gas powered.
Fort lift Truck:

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Pallet Truck:

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Auxiliary Equipments
Devices or attachments used with handling
equipments to make their use more effective and
versatile.
Skid Boxes:

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Expandable Pallets:

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Unit Load Design
• Unit load –amount of material that can be
moved as a single mass between two locations
• Primary advantage of using unit loads is the
capability of handling more items at a time and
reducing the number of trips, handling cost,
loading and unloading times, and product
damage.

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Unit Load Concept

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Methods of Utilizing Unit Load
• Containers
• Platforms
* Skids * Pallets
• Sheets
* Cardboard * Plywood * Polyethylene slip-sheets
• Racks
• Strapping
• Wrapping
* Stretch wrapping * Shrink wrapping Unit
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Skid

Pallet
Stretch Wrap

Shrink
Wrap

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