UNIT-3-(O.

M-R-20)
Forecasting
Casting data forward is called forecasting. It is a projection based upon past data or it is an estimate of an event
which will happen in future.

Need of forecasting:
– When there is a time lag between awareness of an impending event or need and occurrence of that event. This
lead time is the main reason of planning and forecasting.
– Planning is the fundamental activity of management. Forecasting forms the basis of planning.
– It is essential for the organization to know for what level of activities one is planning before investments in
input.

Types of Forecasting:
• Short Term Forecasting
• Long Term Forecasting
Short Term forecasting is the forecasting that made for short term objectives covering less than one year. Ex.
Material Requirement Planning (MRP), scheduling, sequencing, budgeting etc.
Long Term Forecasting is the forecasting that made for that made for long term objectives covering more than
five years. Ex. Product diversification, sales and advertisement.

Forecasting methods
A). Moving Average
• Naive forecast
• Simple moving average
• Weighted moving average
• Exponential Smoothing
• Adjusted Exponential Smoothing
B). Casual or explanatory methods
• Simple Linear Regression Model
C). Qualitative or judgmental methods
• Delphi Method
• Market Research
Moving Average
• Naive forecast: demand in current period is used as next period’s forecast
• Simple moving average
• Uses average demand for a fixed sequence of periods.
• Stable demand with no pronounced behavioral patterns.
• Weighted moving average
– Weights are assigned to most recent data.

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Production planning control:

It may be pointed out that the words production planning and production control are inter connected and
synonyms in nature and are used inter changed by in practical situation as such there can be studied production
planning & control. This is concerned with preparation of production budget, arrangement of machinery,
equipment & materials for work, layout of plant and preparing estimates with regard to labour, routing,
scheduling, dispatching and follow – up operation.

Definition:-
“It may be defined as that co-ordination of series of function according to a plan which will economically utilize
the plant facilities and regulate the orderly movements of goods through their entire manufacturing cycle from
the procurement of all materials to the shipping of finished goods at a predetermined rate supplying.
It is clear that production planning is concerned with deciding in advance how much will be produced
during a particular period of time on the other hand production controls is concerned with initiating various
measures in order to evaluate actual results with the predetermined targets.

Advantages of Production & Planning & Control:-

1. Efficient service to consumers:-A proper system of production planning and control ensures planned
production there by delivering the goods well in time to customers. This creates good reputation of the
company in the minds of people.
2. Minimizing over time work:-Since the production operation are well planned and properly executed and
carried in accordance with time schedules, rush of orders and over time work is avoided.
3. Effective utilization of equipment:-A proper system of production planning & control ensures most
effective and efficient utilization of production equipment.
4. Removal of Obstacles:-An efficient system of production planning & control aims at removing bottlenecks
in the way of proper production thereby minimizing accumulation of work in progress.
5. Effective & scientific purchasing:-On Account of proper system of materials might leading to efficient
inventory control system. Purchases become more scientific & economical.
6. Lesser production time: By planning the things right in advance of operations production time is greatly
minimized, this leads to better & effective utilization of working hours ensuring efficient production in
lesser time.
7. Proper liaison & Coordination:-Production planning & control brings about proper coordination and link
between various activities of production buying, marketing or distribution, quality control cost control and
maintenance etc.
8. Industrial peace and harmony: A properly initiated and well organized system of production planning &
control ensures harmonious employer & employee relations. It is very helpful in building morale of
employees.

Pre requisites for effective production planning & Control:-

For successful implementation of the techniques of production planning & control the following
essentials must be borne in mind
1. Information with regard availability of materials in the stores must be kept in mind.
2. Information regarding machines and other equipment of production must be obtained. The information
should pertain to efficiency, speed and power of these machines & equipment.

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 3. There should be proper knowledge of work in progress
4. Complete knowledge of products to be produced must be obtained.
5. Information with regard to time & service of each production operation in the completion of final
product must be obtained.
6. Complete information related to different type of works and their capabilities to be gathered.
7. Records relating to best performances on similar work with best combinations of machines, tools, and
other conditions of work must be preserved.
8 Adequate and effective control measures must be ensured
9 Besides the above there are certain other essentials kept in mind, production and consumption of power,
customers’ orders in hand and their delivery time and internal material handling & Transportation facilities
available with the organization.

*Various steps or techniques or elements of production planning & control.

The following diagram clearly shows different elements of production planning & control.

Production planning & Control

a) Production budget a) Routing

b) Machinery & Equipment plan b) Scheduling
c) Mfg. Method & process c)Dispatching
d) Plant Layout d)Follow up
e) Time, Motion and work study e)Inspection
f) Man power planning
g) Inventory Planning

AGGREGATE PLANNING
Introduction
Aggregate planning is essentially a big picture approach to planning. We use the term aggregate plan
because the plans are developed for product lines or product families rather than individual products.
For example, aggregate plan in a firm producing television sets specifies how many televisions sets are to
be produced by identifying them with size or model.
It is the process of determining output levels (units) of product groups over the next 6 to 18 months period
on a weekly or monthly basis.

Meaning:
Aggregate planning involves planning the best quantity to produce during time periods in the intermediate –
range horizon (after 3 months to 1 year) and planning the lowest cost method of providing the adjustable
capacity to accommodate the production requirements.

Objectives of Aggregate Planning

1. The overall objective is to balance conflicting objectives involving customer service, workforce
stability, cost and profit.
2. To establish company-wide strategic plan for allocating resources
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 3. To develop an economic strategy to meet customer demand.

Process of Aggregate Planning

A general procedure for aggregate planning consists of the following steps

1. Determine the demand (i.e. sales forecast) for each product for each time period (i.e. weeks or months or
quarterly) over the planning horizon (6 to 12 months)
2. Determine the aggregate demand by summing up the demand for individual products.
3. Transform the aggregate demand for each time period into workers, materials, machines required to
satisfy aggregate demand
4. Identify company policies that are pertinent (e.g. policy regarding safety stock maintaining stable
workforce etc)
5. Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders,
layouts etc.
6. Develop alternative resource plans for providing necessary production capacity to support the
cumulative aggregate demand and compute the cost of each alternative plan.
7. Select the resource plan from among the alternatives considered that satisfies aggregate demand and best
meets the objectives of the firm.

Inputs to and Outputs from Aggregate Production Planning


 The various inputs to aggregate plans that affect the performance of production and operations managers
are:
i. Engineering
ii. Materials
iii. Operations
iv. Marketing and distribution
v. Accounting and finance
vi. Human resources

Preparation of Aggregate Demand Forecast

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 Demand forecast can be classified into long range, midrange and short range forecast. Long range
forecasts acts as the bas for capacity planning.
A company may be manufacturing several products using a set of facilities. The association between the
facilities and the products is generally, many to many i.e., a given facility is uses to manufacture more than
one product.
To forecast the aggregate demand the company follows any one or group of the following strategies.
The variables of the production system are labour, material and capital. More labour effort is required
to generate higher volumes output. Hence, the employment and use of overtime (OT) are the two relevant
variables. Materials help to regulate output. The alternatives available to the company are inventories, back
ordering or sub contract of items.
These controllable variables constitute pre strategies by which fluctuations in demand and
uncertainties in production active can be accommodated by using the following steps.
1. Vary the size or the work force: Output is controlled by hiring or lay of workers in proportion to
changes in demand
2. Vary the hours worked: Maintain the stable workforce, but permit idle time when there is a slack and
permit overtime (OT) when demand is peak.
3. Vary inventory levels: Demand fluctuations can be meet by large amount of inventory.
4. Subcontract: Upward shift in demand from low level. Constant production rates can be met by using
subcontractors to provide extra capacity.

PLANT CAPACITY/CAPACITY PLANNING:

Plant capacity may be defined as the maximum quantity of output that can be produced from an existing plant in
a given time period.
Capacity planning and control is the process of establishing measuring, monitoring and adjusting the levels of
capacity in order to execute all manufacturing plans and schedules in the best possible manner.

Features of capacity:
- Capacity is the highest amount of output
- Capacity is always related to a specific time period
- Capacity may be measured in terms of outputs or inputs.
- It is easy to measure the capacity of a single product firm
- It is very difficult to measure the capacity of multi product firm.

Capacity Planning Strategies

Long term capacity strategy: - Develop New Product lines

- Expand existing facilities
- Phase out Production Plants
Short term capacity strategy:
 Make or Buy
 Additional labor
 Overtime
 Holiday work
 Multiple shit
 Subcontracting
 Hiring

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Measurement of capacity

Steel plant - Tones of steel

Sugar - Tons of Sugarcane Crushed
Automobile - Number of Vehicles
Power plant - Megawatt
Job shop - Number of labor hours worked
Hotel - Number of Rooms
Hospital -Beds
Bank -Number of Accounts

Process of Capacity Planning:-

1. Assessment of Existing Capacity

2. Forecasting Future Capacity Needs
3. Identifying Alternative Ways of modifying Capacity
4. Evaluation of alternatives
5. Choice of suitable course of Action

TYPES OF CAPACITY:-
1. Design capacity or installed capacity or theoretical capacity: - Maximum output that can be achieved
in a given time period from a particular plant. (not considering power break downs, poor planning, non
availability of material, labor absenteeism) 100% utilization
2. Effective or practical or operating capacity:- No plant can work maximum (100%) Capacity due to
plant efficiency factor/and scrap factor. A portion of available hours cannot work due to scheduling
delays/Break downs/Maintenance. This is less than what rated (range from 0.5 to 0.95)
Operations capacity = Maximum Capacity – loss due to efficiency.
Generally 75% to 85% of Installed capacity
3. Actual or utilized capacity:- If Installed capacity is 1,00,000 units , used capacity is 80,000units , then
Capacity utilized is 80%
4. Rated capacity: - if installed is 1, 50,000 units, and produced is 1, 53,000 units, then rated capacity is
(102%)
5. Excess capacity: - Unutilized capacity may occur frequently, due to Seasonal variations and Cyclical
Variations in demand.

Material Requirements Planning (MRP)

Material requirements planning (MRP) is an inventory management system that is completely operated digitally through a
wide variety of computer-based platforms. MRP is exclusively designed to improve the inventory efficiency of a business
by estimating quantities of raw material and scheduling timely deliveries.
In addition, the material requirements planning system (MRP) helps businesses maintain low inventory levels by
controlling manufacturing, purchasing, and delivery activities.

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Before the creation of hardware that could run MRP software, inventory was scheduled by hand and was dominated by
methods such as reorder point (ROP)/reorder quantity (ROQ).

The History of Material Requirements Planning

The implementation and constant innovation surrounding the MRP inventory system created a long-lasting effect that can
still be seen today.
 Before computer-engineered systems became prevalent in the business world, inventory was recorded by hand.
 As time went on, users became aware of how inefficient hand-kept inventory was, creating demand in the market
for the most productive method.
 In the early 1950s, MRP was first computerized by aero-engine makers associated with General Electric and Rolls
Royce.
 Before MRP became commercialized, it was reinvented to use the Polaris program.
 In 1964, MRP was released to specific individual businesses, being used first by Black & Decker.
 By 1975, over 700 companies had implemented MRP as their inventory management system.
 Since 1975, the MRP system has been continuously updated to be made more efficient for businesses. Including
several different models.
 Today, MRP is one of the most common and widely used inventory management systems in the world.

Objectives of MRP

1. Inventory reduction: MRP determines how many components are required when they are required in order
to meet the master schedule. It helps to procure the materials/ components as and when needed and thus avoid
excessive build up of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and component
quantities, timings when they are needed, availabilities and procurements and actions required to meet delivery
deadlines. MRP helps to avoid delays in production and priorities production activities by putting due dates on
customer job order.
3. Realistic delivery commitments: By using MRP, production can give marketing timely information about
likely delivery times to prospective customers.
4. Increased efficiency: MRP provides a close coordination among various work centers and hence help to
achieve uninterrupted flow of materials through the production line. This increases the efficiency of production
system.

Data Needed for MRP Systems

To successfully run an MRP inventory system in an organization, there is an assortment of data required for
successful use.
End Item: The MRP system requires the user to describe what type of product is being created and its specific
demand level.
Quantity: The system requires the user to input the amount of quantity needed to meet specific demand
schedules.
Shelf Life: The amount of time that a product is able to remain in the warehouse is required for the planning
aspect of an MRP system.
Inventory Records: Records of materials available for use, work in progress, and completed.
Planning Data: Restraints and directions, such as labor, machine standards, testing, techniques, and commands,
are required to use the MRP system.

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Bills of Materials: The system requires detailed accounts of materials and components used to make each of
the products.
After inputting all the data throughout the system, it can be run in a business.

Advantages and Disadvantages of MRP

When considering using an MRP inventory system within an organization, it is crucial to know the advantages
and disadvantages associated with implementation. The advantages include:
 Maintains low inventory level
 Reduction of associated costs through material planning
 Ensure capacity utilization
 Extensively tracks every piece of inventory that comes in and goes out
 Reduces cost of warehousing product
 Increased organization throughout the business
 Scheduled shipment and delivery of the product
Disadvantages when using a material requirement planning inventory system include:
 Reliance on the precise input information
 There are scheduling delays, wrong order quantities, and inefficient tracking if the information is
inputted inaccurately within the system
 Requires extensive maintenance of robust databases
 In order to use the system, proper training is required
 The system is not cheap and requires a substantial capital investment

SCHEDULING

Meaning and Definition of Scheduling:

Scheduling means fixation of time and date when each operation is to be commended and completed. It
is an important part of production control. Scheduling lays down ground work for all subsequent steps in
production process.
Scheduling means when and in what sequence the work will be done. It involves deciding to when the work will
start and in a certain duration of time how much work will be finished.
Scheduling is the preparation of time table of activities or action plan for a specific period
Definition:- “The work scheduling consists of the assignment of starting and completion times for the various
operations to be performed”.
According to Kimball and Kimball, “The determination of time that is required to perform each operations and
also the time require to perform the entire services as routed is scheduling
Thus, scheduling is an industrial activity or task which is used to prepare the time table of the activities or
action plan for a specific period.

Objectives of Scheduling: Various manufacturing and planning objectives are accomplished through
scheduling. These are
1. Achievement of High Efficiency: Achieving high efficiency of operations by optimal utilizing machine
and equipment
2. Maintenance of Low Inventory: Maintaining low inventories for in process and raw materials.
3. Maintaining Time: Maintaining short flow time of the products.

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Importance / Advantages of Scheduling: Following are the benefits obtain through scheduling:
1. Scheduling helps to make decisions which deals with collection of scare resources to activities or
customers.
2. It helps to make the effective control of production.
3. It can increase the goodwill of a firm
4. It require less investment of material in process
5. The material storage cost is minimum.

Factors Affecting Scheduling: There are two types of factors which effects scheduling they are:-
1. External Factors
i) Customer’s demand
ii) Customer’s delivery dates
iii) Stock of goods already lying with the dealers and retailers
2. Internal Factors
i) Stock of finished goods with the firm
ii) Time interval to process finished goods from raw material
iii) Availability of equipment and machinery, their total capacity and specifications
iv) Availability of materials, their quantity and specifications
v) Availability of manpower (number, type and kind of skills)
vi) Additional manufacturing facilities, if required
vii) Feasibility of economic production runs

Types of scheduling:-Scheduling is classified into three types

1. Mater scheduling
2. Manufacturing or operation scheduling
3. Detail operation scheduling

Master Scheduling:- It relates to a specified period (Month / fortnight / week). It contains production
requirements of single product or different products during the specified period of time. It is easier to prepare
master schedule for a single product. But difficulty arises where the Number of products are more. Master
schedule usually contains information related to direct material requirements, estimated requirements in Man
hours per product at various work centers and estimated overhead expenses.

Manufacturing or operation scheduling:- Manufacturing schedules are prepared in case of continuous type
of industries. Here uniform products of same size, colour and design are produced. So manufacturing schedules
can be easily prepared. If products are producing in different sizes, color and designs, it is a bit of difficult to
prepare manufacturing schedule. The important information contained in this schedule relates to Name, Number
of the product, Quantity to be produced each day, week or any other stipulated time.

Detail operation schedule: This type of schedule related to allocation of time for each production operation
within each machine and manufacturing process in the organization.
Both routing and scheduling are important elements in the process of production control. They are
interdependent on each other. Proper route cannot be assigned without proper schedule. At the same time
schedules cannot be prepared without the knowledge of exact route of production.

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Supply Chain Management

Supply chain management is the process of integrating the supply and demand management, not only within the
organization, but also across all the various members and channels in the supply chain so they work together
most efficiently and effectively.

There are five basic components in a supply chain management system:

1. Planning: To meet customer demands, supply chain managers have to plan ahead. This means forecasting
demand, designing the supply chain intentionally, and determining how the organization will measure the
supply chain to ensure it is performing as expected in terms of efficiency, delivering value for customers and
helping to achieve organizational goals.
2. Sourcing: Selecting suppliers who will provide the goods, raw materials, or services that create the product is
a critical component of the supply chain. Not only does this include creating the contracts that govern the
suppliers, but also managing and monitoring existing relationships. As part of strategic sourcing, supply chain
managers must oversee the processes for ordering, receiving, managing inventory and authorizing invoice
payments for suppliers.
3. Making: Supply chain managers also need to help coordinate all the steps involved in creating the product
itself. This includes reviewing and accepting raw materials, manufacturing the product, quality testing and
packaging. Generally, businesses evaluate the quality, production output and employee productivity to ensure
overall standards are upheld.
4. Delivering: Ensuring the products reach the customers is achieved through logistics and it’s fundamental to
supply chain success. This includes coordinating the orders, scheduling delivery, dispatching, invoicing, and
receiving payments. Generally, a fleet of vehicles must be managed to ship the products—from tankers bringing
product manufactured overseas to fleet trucks and parcel services handling last mile delivery. In some cases,
organizations outsource the delivery process to other organizations who can oversee special handling
requirements or home delivery.
5. Returning: Supply chain managers also need to develop a network that supports returning products. In some
cases, this may include scrapping or re-producing a defective product; in others, it may simply mean returning a
product to the warehouse. This network needs to be responsible and flexible to support customer needs.
The foundation for each of these components is a solid network of supporting processes that can
effectively monitor the information across the supply chain and assure adherence to laws and regulations. This
involves a wide number of departments, including HR, IT, quality assurance, finance, product design and sales,
according to CIO.
Why is Supply Chain Management Important?

Supply chain management is crucial for any organization because doing it well can introduce several benefits to
the organization; however, poor supply chain management can result in very expensive delays, quality issues, or
reputation. In some cases, poor supply chain management can also cause legal issues if suppliers or processes
are not compliant. Technology advances have unlocked huge potential for supply chain management, enabling
supply chain managers to work closely – and in real time – with members of the supply chain. With supply
chain management, organizations can:
 Anticipate problems
 Dynamically adjust prices
 Improve inventory and fulfillment

What are the Benefits of Supply Chain Management?

Effective supply chain management provides three primary benefits to an organization,

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1. Lowered Costs: By integrating suppliers and applying technology, organizations can lower operating costs
by responding more dynamically to customer needs. For example, managing based on demand keeps
organizations from over-producing, which not only reduces labor and raw materials costs, but also cuts down on
inventory management costs and transportation costs.
2. Increased Revenue: When organizations use technology to stay closer to customer demand and respond
more quickly (as in the Walmart example keeping shelves stocked), it’s more likely products remain available
for customers to purchase. When manufacturing is streamlined to produce just enough, labor and materials can
be devoted to developing new items to offer the customer and expand the product mix. Outside the product
realm, this may mean offering additional services customers.
3. Asset Utilization: With effective supply chain management, organizations can use capitol assets, like
production or transportation equipment, most effectively. Rather than adding wear and tear to manufacturing
equipment needlessly, businesses can produce to the need.
Supply chain management allows organizations to deliver more quickly, ensure products are available,
reduce quality issues, and navigate returns with ease, ultimately improving value, both within the organization
and for the customers.

PURCHASING MANAGEMENT:-

Purchase manager is concerned with the procurement of proper equipment, materials and supplies of the right
quality at the right price at the right time.
Definition:-
“Purchasing is the procurement of Materials, supplies machine tools and services required for the equipment,
maintenance and operation of manufacturing plant”.

Objectives of purchase department:-

1. Procurement of desired quality materials at best price
2. Procuring the materials according to the purpose
3. Purchasing as per the schedule.
4. Avoidance of duplication of Materials.
5. Maintaining the company at competitive position
6. Creation of goodwill to the company while dealing with the vendors
7. Developing co-operation among various departments.

Functions of purchase department:-

1. Market information: In view of the fast changes in market conditions the purchase department must
keep up to date of information regarding the price movements, technological factors, delivery
schedule, reliability of supplies and the various terms at which goods can be supplied.
2. Purchasing procedure: The procedure can be effectively carried with the help of properly managed
purchase department in an organization systematic purchase procedure is as follows.
 Getting the materials requisition from the production department
 Decision of purchase (determination of purchase budget, getting approval from management)
 Studying market conditions and supply sources
 Selection of vendor
 Placing the purchase order.
 Follow up action
 Receipt of materials and checking the invoices
3. Determination& Description of quality: There are number of problems in deciding about best purchase
and often the purchase manager needs considerable technical knowledge before he can purchase goods of
the best quality.
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 4. Control of quality & quantity: - On receipt of goods the purchase department has to ensure that goods are
of the same quality and quantity as were ordered. This may be done through the inspection & laboratory
tests.
5. Selecting adequate sources of supply:- The purchase manager on the basis of his previous experience
marketing information and market survey has to maintain a list of suppliers who could supply him materials
of the required quality, quantity and at the right time.

TYPES OF PURCHASING:-
Purchasing can be either centralized or decentralized by keeping in view the size and requirements of on
organization.
1. Centralized Purchasing: At the centralized purchasing the total purchases are made at one central point
for the total organization and material is issued to the respective departments as an whenever needed.
Centralized purchasing is suitable in cases where the organization runs in one plant. In this centralized
purchasing few persons will involve in purchasing the goods, on behalf of various departments. So, generally
the role of subordinated will be very less in this centralized purchasing.
2. Decentralized purchasing:- Decentralized purchasing is just the reverse of centralized purchasing. This
is suitable in organizations running more than one plant. Under this type of each plant have its own
purchasing agents. In other wards every department makes its own purchases. This is also called localized
purchasing.

*Scientific purchasing:-

The Modern industrial purchasing usually called as scientific purchasing. It is based on the facts. It is an
activity of specialists in the field. It calls upon commercial training on the part of those who are engaged in
purchasing activity. Scientific purchasing, this is an executive activity which calls upon the cooperation of all
the related functions. Two-third of all possible gains to the most efficient Management of production could be
realized by having all the materials ready when you want it, where you want it and in the condition you want it.
As such scientific purchasing is executive job involving cooperation with other functions. It can be stated
that the company can be made more successful provided all the objectives of purchasing are kept in view, while
performing purchasing function.

The following are the main objectives of scientific purchasing (Five ‘R’ principles)
a) Purchase of right quality
b) Purchase of right quantity
c) Purchase at right place (right source) (right vendor or supplier)
d) Purchase at right price
e) Purchase at right time

INVENTORY MANAGEMENT:-

The term inventory may be defined as “The stock of goods, commodities are other economic resources that are
stored or reserved at any given period for future production or for meeting future demand”.

Importance of inventories:-

a).To ensure smooth production:-Inventories help in smooth production of the end product, lack of availability
of parts and materials when needed can disrupt the production process.
b).To provide quick with customer service: - The customer as served bitterly and his goodwill obtained when
the product required by the customer is in the inventory and quickly delivered.
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c).To facilitate production during lead time: - The time between the ordering and receiving the goods is called
lead time. It serves as a hedge against uncertain bad times. If the true gap between ordering and receiving goods
is long or uncertain then it is necessary to keep adequate stock of inventory as a buffer against shortages.
d).To facilitate a reasonable utilization of labor and equipment: - By ensuring smooth and uninterrupted flow
of goods through the production process it facilitates reasonable utilization of labor and equipment.
e).To enjoy the economics of large scale buying:-In order to enjoy the discounts and commissions on large
scale buying it is necessarily that inventory also should be carried on large scale.
f).To enables efficient & economic operations: - Since it enjoys the economies of large scale buying and
facilitates a reasonable utilization of labor and equipment various production operations can be performed
economically and independently. It can allow temporary variations in operating rates.

Elements of effective inventory control:-

The management can have better control on inventories through the following steps
a) Simplification and standardization of products, Materials and tools
b) Maintaining inventory records and furnishing data for accounting
c) Planning and determining total inventory needs to meet the requirements of production and sales
d) Procuring the required quantities of items of proper quality and at the right time.
e) Controlling the storage and issue of materials and tools and the flow of goods in process
f) Conserving and substituting materials and supplied particularly during periods of scarcity.

Techniques of Inventory control:-

1. Setting up of various stock levels
2. Preparation of Inventory Budgets
3. Maintaining perpetual Inventory system
4. Establishing proper purchase procedures
5. Inventory Turnover ratio’s
6. ABC analysis

Setting up of various stock levels:

To avoid overstocking and under stocking of materials, the management has to decide about the maximum
level, minimum level, reorder level, danger level and average level of materials to be kept in the store.
Reordering level = Maximum rate of consumption x Maximum reordering time.
Maximum level = Reordering level + Reordering quantity
- (Normal consumption x Minimum reordering period)
Minimum level = Reordering level – (Normal consumption x Normal reorder period)
Danger level = Average consumption x Maximum reorder period
Average stock level = The Minimum stock level + half of the reordering qua

Economic Order Quantity (EOQ)

EOQ: -EOQ is that quantity of material, which can be ordered at one time to minimize the cost of ordering and
carrying the stocks.
Definition: It refers to the size of each order that keeps the total cost low. Given the annual demand, the cost
of acquisition, and carrying costs, what should be the size of each order? This is EOQ?
Inventory Costs: - The inventory costs can be classified into two categories: Inventory ordering costs and
Inventory carrying costs
a) Inventory Ordering Cost: -This refers to the costs incurred to procure the materials.
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b) Inventory Carrying Cost: - Include insurance costs, property tax, storage etc normally all these work out
20% to 30%.
EOQ: EOQ is that order quantity at which the total cost is minimum.
Where, T.C= Ordering Cost + Carrying Cost

Algebraic Method of Determining EOQ:-

 Step1:- Finding out the total ordering cost per year
Total Ordering Cost per year = No. of orders placed per year × Ordering Costs per order
= A/S ×O
 Step2:- Find out the total carrying cost per year
Total Carrying Cost per year = Average Inventory Level × Carrying Cost per unit
= S/2 × C
 Where A = Annual Demand; S= Size of each order; O=Ordering Cost per order;
C=Carrying Cost per unit

Problem: - 1) A biscuit manufacturing company buys a lot of 10,000 bags of wheat per annum. The cost per
bag is Rs.500 and the ordering cost is Rs 400. The inventory carrying cost is estimated at 10 percent of the price
of the wheat. Determine Economic Order quantity, No of orders to be placed during the year.
 Sol: Given: - Annual demand (A)= 10,000 bags
Ordering Costs per order = Rs 400
Carrying costs per unit ©= 0.10 percent of the unit price of wheat
= (i.e. 10% of Rs 500) = 50
2𝐴𝑂 2 × 10,000 × 400 80,00,000
EOQ= √ 𝐶 = √ = √ 50 = √1,60,000 = 400
50
The Economic Order Quantity = 400 bags
𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒎𝒂𝒏𝒅 (𝒊𝒏 𝒖𝒏𝒊𝒕𝒔) 𝟏𝟎,𝟎𝟎𝟎
The No. of Orders to be placed during the year = = 𝟒𝟎𝟎 = 25
𝑬𝑶𝑸 (𝒊𝒏 𝒖𝒏𝒊𝒕𝒔)

 In the above case, the company has to place 25 orders to optimize its ordering and carrying costs. The
same can be verified as
(1) (2) (3) (4) (5) (6)
No of orders per Order Size in Avg Carrying Ordering Total Cost
year Bags inventory Cost @ cost @Rs per year
(Order Rs.50 per 400 per 6=(4) + (5)
Size/2) Bag order
4= (3)×(50) 5=(1) × (5)
1 10,000 5,000 2,50,000 400 2,50,400

20 10,000 250 12,500 8,000 20,500

= 500
20

25 10,000 200 10,000 10,000 20,000

= 400
25

30 10,000 166.65 8,333 12,000 20,333

= 333.3
30

40 10,000 125 6,250 16,000 22,250

=250
40

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LBRCE-MBA-2 nd semester-Operations Management-Unit-3- (R20)-Dr.V.V.Narsi Reddy
 The table shows that we can optimize the total costs at Rs. 20,000 if the size of each order is 400 bags. It is
economical for the company to place 25 orders during the year to meet the annual requirement of wheat.

2) The following information is about the shock observers used by an automobile workshop:

Annual demand = 4800 units, Unit price = Rs.300, Cost of placing an order = Rs.50,
Storage cost = 3% per annum, Interest rate = 15% p.a
Calculate EOQ and also find no. of orders to be placed.
Sol:- A= 4800; O = 50;
C= storage cost (3% p.a) + Interest (15% p.a) = 18% p.a
= 300 × 18/100 = 54
2𝐴𝑂 2 ×4800 ×50 4,80,000
EOQ = √ 𝐶 =√ = √ 54 = √8888.88 = 94.28 units
54
4800
No. of orders = 94.28 = 50.91 (or) 51 orders.
No. of orders required to be placed = 51.

ABC ANALYSIS: (Always Better Control)

In order to exercise more effective control over materials ABC Analysis method is best suitable one. Under this
method materials are classified into three categories in accordance with their respective values.
 Group ‘A’ Constitutes costly items which are ten to twenty percent (10-20%) of the total items and may
account for about 50% of the total value of the stores. A greater degree of control is exercised in order
to preserve these items.
 Group ‘B’ consists items which are 20-30% of the store items and represent about 30% of the total
value of the stores. A reasonable degree of care may be taken in order to control these items.
 Group ‘C’ consists about 70-80% of the store items and represent about 20% of the total value of
stores. This can be referred to as ‘Residuary Category’. A Routine type of care may be taken in this
category.

Advantages of ABC Method of Inventory Control:

I. It ensures better control over the costly items in which a large amount of capital is invested.
II. It helps in develop in scientific method of controlling inventories clerical expenditure was reduced
and stock is maintained at optimum level.
III. It helps in maintaining stock turnover rate at higher level through scientific control of inventories.
IV. It ensures considerable reduction in the storage expenses
V. It helps in maintaining enough safety stock for ‘C’ category of items.

Particulars A B C
1.Control Close Reasonable Less
2.Safety stock Less Moderate Moderate
3.Reorder period High Low Very less
4.Value analysis Regular Less Nil/negligible
5.Preparation control Frequent Moderate Nil
statement
6.Inspection Regular Moderate Very less

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LBRCE-MBA-2 nd semester-Operations Management-Unit-3- (R20)-Dr.V.V.Narsi Reddy
S.No Name of the Basis of the Classification Particulars
Classification

1 ABC Value Always –Better-Control

2 V-E-D Importance Vital-Essential-Desired goods
3 S-D-E Availability Scarcity - Difficult – Easily
4 F-S-N Moving Fast – Slow – Non moving
5 H-M-L Consumption High-Medium-Low
6 G-O-L-F Supplier Govt – Own – Local - Foreign

ABC Analysis Comparative Statements

A Items B Items C Items

High Consumption value
1.Very Strict Control
2.Very low safety stock or no
safety stock
3.Frequent ordering (or) weekly
deliveries
4.Weekly control statements
5.Maximum follow up
6.Very strict value analysis
7.As may sources as possible
for each item
8.Accurate fore cost in
materials planning
9.Individual postings
10.Central purchasing &
storage
11.Maximum efforts to reduce
lead time
12.Must be handled by senior
officers
Moderate Value Low Consumption Value
Moderate Control Loose control
Now safety stocks High safety stocks
Once in 3 months Bulk ordering once in months
Monthly control statements Quarterly control reports
Periodic follow up Follow up in exceptional cases
Moderate value analysis Minimum value analysis
Two or more reliable sources Two reliable sources for each
item
Estimation based on past data Rough estimates for planning
Small group postings Group posting
Combination purchasing Decentralized purchasing
Moderate efforts to reduce lead Minimum efforts to reduce lead
time time
Can be handled by Middle It can be fully delegated
management

VED Analysis:

VED stands for vital, essential and desirable. This analysis relates to the classification of maintenance spare
parts and denotes the essentiality of stocking spares.

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LBRCE-MBA-2 nd semester-Operations Management-Unit-3- (R20)-Dr.V.V.Narsi Reddy
 The spares are split into three categories in order of importance. From the view-points of functional utility, the
effects of non-availability at the time of requirement or the operation, process, production, plant or equipment
and the urgency of replacement in case of breakdown.
Some spares are so important that their non-availability renders the equipment or a number of equipment in a
process line completely inoperative, or even causes extreme damage to plant, equipment or human life.
On the other hand some spares are non-functional, serving relatively unimportant purposes and their
replacement can be postponed or alternative methods of repair found. All these factors will have direct effects
on the stocks of spares to be maintained.
Therefore, it is necessary to classify the spares in the following categories:
V: Vital items which render the equipment or the whole line operation in a process totally and immediately
inoperative or unsafe; and if these items go out of stock or are not readily available, there is loss of production
for the whole period.
E: Essential items which reduce the equipment’s performance but do not render it inoperative or unsafe; non-
availability of these items may result in temporary loss of production or dislocation of production work;
replacement can be delayed without affecting the equipment’s performance seriously; temporary repairs are
sometimes possible.
D: Desirable items which are mostly non-functional and do not affect the performance of the equipment.
As the common saying goes “Vital Few — trivial many”, the number of vital spares in a plant or a particular
equipment will only be a few while most of the spares will fall in ‘the desirable and essential’ category.

SDE Analysis:

The criterion for this analysis is the availability of the materials in the market. In industrial situations where
certain materials are scarce ( specially in a developing country like India) this analysis is very useful and gives
proper guideline for deciding the inventory policies.
The characteristics of the three categories – S, D and E – are:
S: Refers to scarce items, items which are in short supply. Usually these are raw materials, spare parts and
imported items.
D: Stands for difficult items, items which are not readily available in local markets and have to be procured
from faraway places, or items for which there are a limited number of suppliers; or items for which quality
suppliers are difficult to get.
E: Refer to items which are easily available in the local markets.

FSN Analysis:

This analysis classifies inventory based on quantity, rate of consumption and frequency of issues and uses. Here
is the basic depiction of FSN Analysis:
F stands for Fast moving, S for Slow moving and N for Nonmoving items.
 Fast Moving (F) = Items that are frequently issued/used
 Slow Moving (S) = Items that are issued/used less for certain period of time
 Non-Moving (N) = Items that are not issued/used for more than certain duration
Moreover, there are thousands of such items. Scrutiny of these items is made to determine whether they could
be used or to be disposed off. The classification of fast and slow moving items helps in arrangement of stocks in
stores and their distribution and handling methods.

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INVENTORY MANAGEMENT (Problems)

1. An industry estimates that it will sell 1200units of its products for the coming year. The ordering cost is
100/- per order. Carrying cost per unit per year is 20% of purchase price 50/-per unit. Find 1) EOQ 2)
Number of orders per year. 3) Lead time 4) Total annual cost.
2. A local distributor for a national company expect to sell approximately 9600 units. Annual carrying cost
is 20% of purchasing price 20/- and ordering cost is 75/- and the distributor operates 288 days in a year.
Find 1) EOQ 2) Number of orders per year. 3) Lead time 4) Total annual cost.
3. ABC manufacturing company purchases3600 units at 65/- each. Ordering cost is Rs 31/- per order and
annual carrying cost is 10% of purchasing price. Determine 1) EOQ 2) Number of orders per year. 3)
Lead time 4) Total annual cost.
4. A Biscuit manufacturing company buys a lot of 10000 bags of wheat per annum. The cost per bag is
500/- and the ordering cost is Rs 400/-. The inventory carrying cost is estimated at 10% of the price of
the wheat. Determine EOQ.
5. The following information is about the shock absorbers used by an automobile workshop :
Annual demand : 4800 units
Unit price : Rs 300/-
Cost of placing an order : Rs 50/-
Storage cost : 3% per annum
Interest rate : 15% per annum
Calculate EOQ and also find the number of orders to be placed.
6. The following information related to company.
Annual demand : 24000 units
Unit price : Rs 24/-
Cost of placing an order : Rs 40/-
Storage cost : 3% per annum
Interest rate : 1% per annum
Determine EOQ and total annual cost.
7. Find EOQ, if annual demand for an item is 20000 units. The cost of holding one unit in stock for a year
is Rs 0.30 and an order cost Rs 30.
8. Determine minimum level, maximum level, ROL with the following information.
Normal usage : 5000 units per day
Minimum usage : 2400units per day
Maximum usage : 7700 units per day
Lead time : 10-20days
EOQ : 8000 units.
9. Calculate minimum level, maximum level, ROL with the following information.
Normal usage : 220 units per day
Minimum usage : 100units per day
Maximum usage : 280 units per day
Lead time : 10-20days
EOQ : 3000 units.

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