UNIT INVENTORY MANAGEMENT PART-A SHORT QUESTIONS WITH SOLUTIONS qt, What is inventory control? Answer = (modi Papa, tfc) | Apr. 49, Ses 216) ratory control i the system by which inventory is managed, The recording Of goods as they are received and 25 ‘hey oer hat an inventory balance maybe maintained and periodically checked eesins! 8 physical count nportant objectives of inventory control are, ne qo provide good customer service teprovide high quality material in right quantity a right imé, at right place and cost reduce financial investments in inventories. a. Give a short note on Line of Balance. risthay-19, Sot2. 6 (apriMay-17, Se+-4, (6) [A ‘op is an evaluation technique which involves chats used for analyzing and contotiNg product and serviees that are «eye cats the specific detivery schedules. The concept of LOB technique is 98 S816 the Time Phased Order Poi op) system and Material Requirement Planning (MRP) system The LOB efine inventory. What are the various reasons behind carrying sth running of business are vkaging spares ete. The Busi to ensure efficient and smoo tw materials in process, Pa jooth operation. joods or commodities that are stored in an organization Jes. The goods or commodities refer to finished products, ra Justry usually maintain a reasonable inventory of goods to ensure sm for Carrying Inventory © very firm should maintain sufficient stock of inventories for the following reasons c, hence some time elapses Jc is subjected to variations. ‘occurs in pi he materials are not immediately available whenever an order is placed for fresh ston siosk aves, The period between the time of placing the order and time of arrival of stoei 11 Th J hence hold some reserve stock in order to allow production operations to continue 8 < tothe variation inthe demand, changes may occur in the manufacturing program. In oxde! 1 meet the crand, the company must have enough inventories stock to allow the production without interferencs, Siock-out occurs, when a firm has litle inventory. Te stock-out of essential materials means interruption in the; Duc tothe interruption, the cost of production raises. There may also be delay in the delivery of goods to the eust few such delays even a patient customer would start looking out for another supplier who can give him b i men and machinery will remain idle, if there is a stock-out of materials. Hence, for better utilization, machinery, the company must keep enough stock of inventories en Some times, due to wide fluctuations in the output and in the demand of certain materials, the i It 0 get. To ensure that production operations are unaffected by the scarcity in the market, id by the firms. is inventory management and control? vary Management Inventory management focuses on the development and administration of policies, Juce total inventory costs decisions and functions like customer service ic. While inventory control refers to the administration of established policies, sy « inventory management and control and few such factors ae typeof produc, otives of Inventory Management sf i is censure that raw material, spares and finished goods are ininterrupted production and sales. To avoid overstocking and under stocking of inventory, Jo avoid the losses due to deterioration, pilferage, wastages and Fo control the material cost so that overall cost of production can be fo ensure good quality of goods at reasonable prices.UNIT-3 Inventory Management 25 Factors Influencing Inventory Management and Contro The various factors influencing inventory management and cox rol are as follows, ‘ 1, Type of Production The type of production affects inventory management and control. Inventory control plays a significant roe in the firms employing continuous production system, Whereas, the firms employing interittent production system do not requite continuous tory items onto} of INV 3, Kind of Product if Ye prnluets may be categorized into two types, They are, products with high unit value and products with low unit value. Incase, ifthe materials used in the production of a product are of high unit value, then the products need to be monitored and controlled closely, and ifthe materials used in the product isin short suppl, then this affects its purchase and its stock. 3 Qua The extent of control of inventory iter higher will be the extent of control of Production ms also depends upon the quantity of production, Higher the volume of items produced, 4 Level of Sales ‘The most important factor which affects the level of inventory in a company is its level of sales activity of the + me company. When the sales of a company increases, the amount of inventory will also increase. 5, Life of Finished Goods In many companies, finished products have some specific time period of life, after the expity of that peviod they are of no value. In some companies, products lose their value due to changes ip fashion, technology, style and due to obsolescence. ined by the company. Hence, all the above are the factors which determines the adequate amount of inventory to be mai Q13, Explain the procedure of inventory management and control. Answer : The process of inventory management and control involves four steps which are as follows, Step 1: Assessing the optimum Inventory Levels Assessing the amount ov dist ‘ , and control process. In order to determine the level of inventory which a firm should hold all the below factors must be eo ofixenory isnot always same, it keeps on changing. So, stock must be reviewed fequenty, (i) Thesales trend should be closely monitored and the inventories must be adjusted beforehand due to char rate as determined by its actual sae. i) _Aclose analysis of the manufacturing process helps in enhancing the actial level of inver (i limination of irrefevant details helps in decreasing “he work ° sroorece Step 2: Ascertai ing the Deg The second step of inventory management and control proces is to ascertain the deg the objective of inventory management. This problem ean be overcome by classifying the by using ABC classification, ABC classification helps in determining the degree of in Step 3 : Planning and Designing the Inventory Control System ‘ yer icies for mainta Inventory system provides a framework and operating pol ) Fixed Order Quantity Sys! The fixed order quantity system is in known the stock attains the reordering level.PRODUCTION PLANNIN! the basis ofa ordered 0 Fined Order Period System tem, the inventor isn the "system. The on The ic onder ero ste ia known as syste. IOS period and not on the basi ofthe stock level. The size of i ‘of quantity is different each time, the order is placed. arrangement structure Step 4 : Ascertaining the Organizational Arrangement Structure ganizational arrangs to ascertain the OT forms the function of in The final step of inventory management and control process is 19 ET tment Per handling and managing the inventory materials, Production planning an control then itcan attain the control department, Ifa firm assigns the inventory control function to production planning and contro) benefits, as the lead ti ‘The inventory control system is not fixed. It needs to changed frequently & con changing from time to time, Q14. Classify inventory models. Discuss briefly any one of them. Answer : sme and type of consumptions Classification of Inventory Models Inventory models are classified as, at a peepee es Continuous Demand a Figure: Classification of Inventory Models Deterministic Model 3 i The deterministic models are further classified as, (®) Purchase model with Instantanous Replinishment and without Shortages Under this inventory mode, the equal size of orders ae placed at periodical restaked immediately andthe items are consumed at constant rat. The purchase pres per vt (i) Purchase Model With Shortages (Instananeous Supply) In the purchase model, the items on order will be immediately received and Purchase price per unit willbe same regardless of order size. Incas, stock is hot ernie then ts presumed that wil be satisfied during any othe dat long with penalty ang (ii) Manufacturing Model without Shortages . is When company manufactures is component which is needed fo ity model of inventory is termed as “Manufacturing model”, This model will be the rate of consumption of items is uniform during the whole year, | (iv) Manufacturing Model with Shortages Under the manufacturing model with shortages, the items are othe cycle time. The Consumption rate pe units uniform during the regardless of production lot size. The stockout i allowed in this model, It js, from the unis which wil be produced ata later date along with peat ang Look for the SIA GROUP.eco e . oeers UNIT-3 Inventory Management S37 ais. Whata ‘Answer ¢ he advantages of inventory control? What are the symptoms of poor Inventory control? Aprit-18, Sot, 4a) Advantages of Inventory Controt The following are the advantages, benefi Inventory control makes sure that mate interruptions or disruptions in operat of inventory management and control, tials are supplied adequately, stockouts and shortages are reduced and avoids costly ions thelps in reducing the investment in inventories, inventory carrying costs and obsolescence loses, 3. Ithel tos in wilizing the sock effectively by allowing inte department trnafers within te fm, ips in examining the loss of materials caused due to negligence or plferage. ‘acts asa means for assessing the cost of material tothe products, department or other Operating scoot & The values of perpetual inventory acts as a consistent and reliable basis for developing Financial statement Ir helps in identifying and disposing irrelevant and obsolete items of stores, Symptoms of Poor Inventory Control 4 Whel ‘The symptoms of poor inventory control are, \ Out of stock of important items, 2. _ Excess inventory (Le items in inventory more than required), 3. Multiple descriptions for same item, 4. Lack of knowledge regarding inventory’s asset value. 5 Lack of specific person assigned with the responsibilty of monitoring stock items. 216. Explain the various functions of inventory management. Answer + i } (Apriit8, Sets, a4(a) | Apsi-15, Set2, a The key function of inventory control is to increase profitability with the assistance of manufacturing and marketin ‘The various functions of inventory management and control are as follows, % 1. Inventory Investment Alternative ha laventory is considered asa key area of asst deployment which shouldbe needed to give a minimum return The concept of Marginal Efficiency of Capital (MFC) states that a firm should make investment in the i fxcater return than capital cost to borrow, The investment alternative “I” on the MEC curve is acceptable as: below, ‘ ‘Accept inventory investmentING Al 3.8 PRODUCTION PLANNI iat vENTO! See | eu As per MEC curve, almost 20 pereent of the inventory 3.3 the various Coste, ssscchi investment alternatives will provide a return on investment | 47, piscus> eda Papers AMY 0 above the cost of capital per day, Each and every onganization inventory: fi ismore focused towards return on investment or retumn on assets employed wus inventory costs, ics. ‘ ates explain about vario ‘a Ret on eapital (assets) ~Profivcapital (assets Cee ) oR soca Sater ital a ’ Explain various costs (Se) (Se ‘) inventory: \ Sales Assets. ee ad 2. Geographical Specialization ves different eo wal oe invol anaged with proper care ds of an organization. Dep n broadly categorized into two Inventory which should be man total production cost nature, costs have beet (i Direct cost and Inventory even allows geographical specialization of individual operating units. The economical location for ‘manufacturing is far from areas of demand due to factors of production like power, raw materials, water and labour. The manufactured goods {rom different locations are gathered at simple marchouse/plan. to assemble in final product or to Gi) Indirect cost. provide customers a single mixed product shipment. This | further gives economic specialization among manufacturing | @ Direct Cost and distribution units of an enterprise. Direct cost is again classified into four ‘components as follows, ‘The Capital Costs 3. Decoupling This inventory function gives maximum efficiency of | (@) operations within a single facility. Decoupling is generally carried out by splitting operations in a manner that one operation’s supply is independent of another's supply. Decoupling function aims atthe following, It can be estimated by determining. which reflects role of both iny ‘opportunity cost of capital. It multiplying internal cost of | product. In case of downstream| such costs tend to increase to the products. (@) The inventories are. generally required to decrease the dependencies between successive stages of operation in a way that break-downs, material shortages or other production changes at one stage may not effect another stages to shut down, (6) 18 also helps an organisational unit to schedule its | (gy operations independently of another 4, Balancing Supply and Demand inventories are usual ny Balancing function deals with elapsed time between costs”. Storage space consumption and manufacturing. This type of inventories are found to the ‘occur to reconcile supply with demand. The balaneing function of inventory needs investment in seasonal stocks which are estimated to be fully liquidated within the season, 5. Safety Stock Safety stock or buffer stock function deals with short range differences in either demand or replacement, An effective inventory planning is required to determine the size of safety stocks. This function of inventory protects against two types of uncertainty. The first type of inventory deals with sales inexcess |‘! of forecast during replenishment period and the second type | * of inventory deals with delays in replenishment, Furthermore, |" safety stock helps in improved perfprmance,Inventory Management BH service Costs Insurance and taxes comes under the category of service costs of inventory. Stich costs are fixed as a penalty on the business depending on the volume of inventory. Suppose if high levels of inventory have to be provided, then more amount of penalty is charged on the business a Risk Costs Risk costs are usually dependent on the nature of tousiness. In this context, obsolescence cost is found to be the most important cost as shift in technology or trend makes certain products to be absolute. Such costs cennot be estimated aecurately as they are ercunstanil/ situational in nature, Indirect Cost wo In SCM, inventory also includes certain costs that are sgrectly related to the total cost of inventory. (a) Business Risk Every firm has to maintain optimal level of inventory for ing customer demands, In the absence of optional inventory level, firms have to face two issues. ) Ifthe firm does not maintain sufficient inventory to meet the demand of customers, then it has to face a risk of loosing its existing customers, (i) Even though excessive maintenance of inventory is able to satisfy customer demands, it is also characterized by increasing the direct costs by increasing capital costs, storage costs source and risk costs. Thus, management needs to take effective decision ding the level of service required forthe achievement, # logistics, marketing and corporate objectives. (>) Opportunity Costs Dynamic companies have huge investment opportunities. Ifsuch firms invest huge capital on inventories, then they have to incur opportunity costs as they do not left with ‘much capital to invest in other alternatives. (0) Infrastructure Costs Such costs have to be increased by the firms if they holds excess inventory within their warehouses as excess inventory associated with over-investment in facilities nd transportation. 7 218. Explain various components of, (i) Carrying costs (ii) Order costs. 2 Answer : 6 Carrying Costs the ee differ directly capital along with the stocks. However, they differ With the inventory size and the time the item i beld in stOeke holding cost or carrying cost are Diferent components of st0e 5 follows, ] 2 Cost of Money or This is considered as the key component of in carrying costs or stock holding cost. The cost of money borrowed from the bank may be about 18 to 20%. But this issue is observed in a different manner particularly regarding how much the organization would have teamed, Furthermore the capital had been invested in an alternative project like developing a new product and 80 on. However about 15 to 20% of the value of the inventories is undertaken. Cost of Storage Space Cost of storage space refers to the rent forthe space used by the inventory. It includes space expenses, heatni, lighting and other atmospheric control expenses. It typically vary from 1 10 3%. Depreciation and Deterioration Depreciation and deterioration are highly essential for fashion items or those items which are under2oing chemical change at storage place. It deals with agile items like crockery which are liable to damage, breakaze and so on. However this may vary from 0.2 to ! 0% of the inventory cost. Pilferage Cost, It relies on the nature of the item. Generally valuable items are more attractive, but there is: less possibility of heavy casting or forging being stolen. Thismay vary about 1.0% of the inventory value. apocill Obsolescence Cost Obsolescence cost refers to th. ‘ure of the ite Electronic and computer components fast ‘Any change in design also results in ‘may help to measure the percentage In “obsolescence and may be calculated at value. em Handling Cost Handling cost generally with movement of stock like cranes, gantries and other mmera e. 3.10 (a) Salary and statutory payments of sales/purchase staff (b) Office space (6) Depreciation of office equipments (®) _Stoioneiy ai 4 eharged (©) Advertisement tenor mis tender opeing formalities (Follow-up, travel, telephone, grams, postal () Costs of souree development (Cost oF enteitaining Q19. Explain the faétors affecting the Inventory costs. Answer Apeimay-47, Sot2, a4) Every company must identify the fietors that effect the level of inventory. So that, company can maintain an adequate amount of inventory and invest funds wppropriately. Following are the factors which influence the level of inventory, rs Level of Sales The most important factor which affeets the level of inventory in a company is its level of sales activity ofthe same company. When the sales ofa company inereases, the amount, of inventory will also inerease Length of the Productio The companies which take: it must mainiain rel any order during much time to produce a unit, lativ-.y large amount of inventory. So that, production process ean be met immediately. ‘without any delays. The amount of inventory to be maintained depends on type of industry and product 3. Access to Raw Materials The amount of inventory of raw material isalso necessary rection techniques adopted iin Different se ollows, stem control 59 ‘anc Analysis : « the most popular technique rial mci CS ids for Always Ly sci sc alge es he ae a analy aw by H.Ford Dickie a js the most effective technique ARC items into A, B and C, a anid : ‘i stands for vital, essential and desi bs a inventory items are classified into three . ana a of inventory Hers. VEDI : aa se the importance of an item and its 1 rene ; 2 ENSDAMIH ieee aa : four categories inthe descending order of their : rst moving tens The hei i arecontauel tert aay so ee : ‘observed constantly and all steps should be 3 their stocks in time. formal moving items; The are consumed over a year or so. S = Slow moving items; The for the company, as itis the basis for finished goods, The level oF raw material inventory dé lepends on many factors such as, (@) Lead time (which is the time period between onfering and delivery of a product) (b) Storage eapacity-availability of warehouses. (©) Problems related to transportation, (Risk of obsolescence, © o Physical life of raw materials, Skill of negotiating the price of raw material, 4. Life of Finished Goods !nmany companies finished produets have some specie time period of life, after the expiry ofthat period they are ag of no value. in some companies, products loose their value due to changes in fashion, technology, style and due to ob:olescence, Hence, all the above are the factors whi s which determine the ‘adequate amount of inventory to be maintai are used up in 2 years or so. The repleni carefully to avoid surplus stocks. D = Dead stock; The *D’ items further demand can be foreseen. Dead spent that cannot be realised and occup) no altemat Ne use forsuch items, they ENSD analysis helps in th stores and in determining the dist Itis also helpful in. controlling | 4 HML Analysis fe HML stands for followed for conductin analysis, The only a ABC analysis, Slegorizing the invent ‘unit cost is taken as baci Theunitecosts of ined bythe company, Look for the SIA GROUP {og analysis,UNIT-3 Inventory Management 3.11 Tn HME analysis, the inventory Heme are classified into hrc 1 > High unit vatu 0 items i) M-> Medium unit value tems and ji) L> Low unit value items «SOS Analysis In SOS analysis, the inventory items are elassified into ayo categories i (i) Seasonal items and, Gi) Oft-seasonal items, * It would be beneficial if the firms purchase seasonal sat low prices and maintain it instead of buying them at igh prices Curing off seasons. Depending on the chaniges in the prices and availability of items, the materials manager decides the quantity of items to be purchased and the price at which they have to be purchased, 6 SDE Analysis In SDE analysis, the inventory items are classified into ree categories. They are scarce items, difficult items and easy to acquire items. This categorization is done on the basis of the availability of items, Scarce items have low supply and are usually imported from outside, difficult items are those items ‘which are available naturally but are difficult to acquire and easy items are those items Which are available at local markets and are easily acquired } 1. Golf Analysis’ GOLF stands for, G— Government source of supply 0 ~ Open market source of supply L- Local source of supply ' F — Foreign source of supply. In. GOLF analysis, the inventory itéms are classified on the basis of the source of supply. *G” category consists of government suppliers, *O” category consists of open market suppliers who are huge in number and acquiring items from. these suppliers is easy, *L’ category consists of local suppliers \ho sell the items on cash basis and lastly “F” category consists of foreign suppliers. Purchasing items from foreign suppliers isa time consuming process. So, to avoid the lengthy process ofimporting items from foreign suppliers the firms ean import items in huge quantities which can meet its annual demand, 8 XYZ Analysis The procedure followed for categorizing the items inXYZ analysis is same as ABC ahailysis. The only difference between these wo analyses is than ABC analysis, the categorization Of items is done on the basfs of annual consumption value whet *Sin XYZ analysis the bategorization of items is dane on the basis of inventory value of items in stores: i SPECTRUM ALL-IN-ONE JOURNAL FOR ENGINEERING STUDENTS: aan eis conong re average rnvetory valae ean te ventory of tems which ae 10% rane cc of tee stored andaccous or 70% ofthe ttl ne nike same ay," emsare 20% of mumber Bh ten, are 10% oF the number of ems tore and account for 1M of the total nventory vale 3.4.1 ABC Analysis” t Q21. How do you classify inventories into A clas B class and C class items? Explain the significance of ABC analysis. oR What is meant by ABC analysis? What is its significance. Answer ¢ (Model Papers, a4() | AnrilMay-19, Sat, Aa) ABC Analysis ‘ABC analysis is the most popular technique used for inventory control. ABC stands for Always Better Control. ABC analysis was developed on the basis of the Pareto’s principle or Pareto's law by H.Ford Dickie. It is very essential for a company to purchase and stock huge Wariety of items for meeting the demands of different manufacturing departments. The stock on hand has to be checked regularly by the stores manager for placing the replenishiment orders on time and avoiding the stock-out situation, Replenishment order is placed when the stock of tbe item attains the recorder point. It is very difficult to keep track on the stock leve! of each item and accordingly placing: the orders regularly. So, the total inventory items im the stocke has to be divided into varinus categories. The categorization of inventory helps the inventory manager to focus om the items having high value. ABC analysis i : which helps in classifying the inventory items into A, B categories a ‘The inventory items which require high categorized as *A’ items, the inventory items medium control are categorized as ‘B” items a ‘which require least control are categorized as. assumed that 10% of the items will have 70% value and requires high conttol, 20% of theiten consumption value and requires medium the items will Have 10% consumption control. ‘ The following figure depic! inventory items, into A, B, an¢‘eategory items | eateyory | 100% 10% 30% Percentage of tems ical Representation of ABC Analysis: Figure: nificance of ABC Analysis « following points, c© oF Significance of ABC analysis can be understood from the follo eee nce or Significance of ABC ana caatteee 3C analysis facilitates selective control and thereby saves valuable time of ex climinates Tot of unnecessary work invélved in various control procedures. results in b and economie control of items in inventory " whicl lly results in cost scilittes inventory control and control over usage of store materials which finally F and Explain the procedure involved in carrying ABC Analysis, List out the advantages. of ABC analysis. ocedure for ABC Analysis \ he steps involved in ABC analysis are as follows, | ihe Est step, the information relating to the items ie, total number of items, annual consumptio unit is called and tabulated. * He second step, the annual consumption value in rupees for each item is calculated by usit >nsumption (in Rupees) = Number of units x Per unit cost this step, arrange the caleulated annual consumption Values in descending order?” "He Four tp, ibe cumulative vals ofthe annual conpunaten ata are ind C categories by dividing the items in inally, the items are classified into A, Ba ‘onsumption values ‘ages of ABC Analysis H « of the advantages oF ABC analysis are as follows, sclitates selective control and thereby saves valua liminates lot of unnecessary work involved in Yori jesults in better and economie control of items in i ‘ e \ facilitates inventory control and corto over usage of stone ‘materials w1 By classifying inventory into ABG, itis al86 ee of a ins inventor aa ble time of executives, ‘ous control proged inventory, |Step 1 the items into A, B and C categori NIT-3 Inventory Management Fpamvantages/ Limitations OF ABC Analysis [ABC analysis is considered as an effective technique for selective control: However it has follows Although ABC analysis is a fundamental tool for exercising selective control permit precise consideration of all relevant problem of inventory contol ABCs meee pay diese, oi in a firm will become most high val The periodic consumption value is considered as the basis for ABC clas can disregard the requirements of spare parts the criticality of which is high, ’ ” PROBLEMS ON ABC ANALYSIS: Z An engine manufacturing company stacks the items as shown in the following table in its stores. The. ‘of units/year are also given in the same table. Classify unit price, annual consumption quantity in ter Lupdlated periodically, the re items during crisis and hence requires more attention. 3.13 {ew limitations which are a over various inventory items, it does not al purpose of control may not be furnished. For fication, beeause of which ABC classification but the value of consumption is low. dompanen [ts Annual rice/Unit cate Description ‘a Demand (unitsiyear) €001 | Connecting rod ‘500 ‘600 002 | Crank case 4,000 600” cogs Cylinder 2,000 600 004 | cylinder head 3,000 600 = 005° | Crank shaft 4,000 600 coos = |cam 500 1,200 007 | Nozzle 500 600 coos —_| Valve set 1,000 4,200 C009 | Fuelinjection pump | 1,500 600 co10__| Exhaust pipe 500 600 Solution + Calculation of Annual Consumption Value of given Component in Rupees Annual Demand b) [ Component | Price/Unit ® (a) ‘Annual Consumption | ‘Value (@) in (000°s) (axb) 600 500 300 600 2,000 2,400 1,200 1,800Le culate Cumulative yy and Cal Step 2 consumption wal Rearrange the Items in the Descending Order of An acy ‘Component DescendiN& Code | Value ee 000") coo? See co0s eae coos 80 6003 Ue Si 1,200 009 £09 C006 600 coo 007 co10 Total Table2 Step 3 ; Since the basis for ABC classification is not given in the problem assume the following basis. Category | Percentage of Total (ACV) ar. A 710% B 20% c 10% Table3 | i.e, 70% of total ACV is consumed by category ‘A’ items, 2 is of the ACV is consumed by eategory ‘C'liems, aes oto its 70% of total ACV= 0.70 * 1,14,00,000 : = 79,80,000, Since this value is nearer to cumulative ACY of ® 90,00, a the category ‘A’ items, enn Category (A +B) together accounts for 90% of total ACY, ie, (10 420 90% of ACV = 0,9 * 1,14,00,000 ‘a = 1,02,60,000, Since this value is nearer to cumulative value of ACV of & “B" category items. The remair'y items C001, CO07 and CO10 are Look for the SIAyniT-3 Inventory Management Sen4 Categorization of Items Tabled 24. For the following data of inventory of a production stores, conduct A-B-C analysis. [item no. | Quantityiyear Step 1 Calculation of annual consumption value of given items in rupees.3.16 Step? Step 3 2 basis, ‘Since the basis for ABC classification is not given in the problem assume the following Ferceatage of total ACV q ie, 7 items constitute 10% of the total ACV. For catagory 4, 10% of otal ACV = 70% of ©3,55,710= Typ * 35,770 = © 2,49,039- Category (A + B) together accounts for 90% of ACV = 90% of © 3,55,770= hh x 3,55,770 =23,20,193 ‘Since this value is nearer to cumulative ACV of € 3,31,270 therefore B. The remaining items 10,8 and 9 are finally categorized under ‘C’ category, Step 4 4 Construction of ABC Analysis graph Exact Average of ACY of ‘A’ Catagory items, m a 070 199UNIT-3 Inventory Management Percentage of (4 + B) items, 3,31,270 3,55,770 * 100 93.11% re OFACV of 4 (AtB)%—A% 93.11 - 76,19 = 169: Expected percentage of ACV of *C? 100 93.11 = 6.89% Expected perc togory items, egory items,a I ee ~ a onTROL INTU-KAK ig AND . 3.18 PRODUCTION PLANNIN 3.4.2. VED Anal ee limitations: 25. What is meant by VED analysis? Discuss its significance apeuay-12, Sot OR Explan VED analyte fleeting tems, a What is meant by VED analysis? What is its significance? (Refer Only Topics: VED Analysis, Significance of VED Analysis) oR What is VED Analysis? Explain its significance. : ‘Refer Only Topics: VED Analysis, Significance of VED Analysts) ote paper a) APY 8, St Answer : j eae items are classified into three categories VED stands for vital, essential and desirable, In VED analysis, the inventory i die ack oe fan iter ‘on te eritialty of inventory items. VED analysis aims a ascertaining the importance and other activities. i 1 for spare parts which re vital VED analsis approach is usually applied fr categorizing the spare pars. The spare PAT Ag caer and oter activites are grouped into “V" category the spare parts which are essential for man face 2 _souped into “category and the spare parts which are only desirable but not esenil for perform ng mc operations are grouped into ‘D” category firm has to maintain huge stock of inventory for of minimum stock is sufficient for ‘D" category items Significance of VED Analysis Following points highlight the significance of VED analysis, {tis helpful in monitoring and controlling spare parts and stores inventory. “ 1 2. It is useful when procurement’ lead time is longer. 3. Its used to determine criticality and its impact on production and other services. 4. Its useful in continuous manufacturing system. 5. It facilitates in maintaining and controlling of different types of stocks, Limitations of VED Analysis Following are the limitations of VED Analysis, 1. It doesn’t have a value wise list 2.__ Optimization with only VED analysis will not be beneficial, | . 226. Discuss in detail the combined analysis of ABC and VED analysis, Answer : ‘The combination of VED analysis and ABC analysis provides combination of items ase Classification VED analysis % 5 2 Vv] tnventory A= Less Zlal av . i V=More yg B= Medium] 2/a] av : V=More C=More ec] cv ce} ea V=More: |" Figure: Combination and. c Look for the SIA GROUP Loc oe3.19 NIT-3 Inventory Management V, CE and CD. The combined analysis of ABC and VED analysis shows 9 Nems, such as AV, AE, AD, BV. BE, BD, C pes ems ca be eatezorized into three categories, Category 1 Category 2 and Category 3 Category 1 one 1, the ae {ing combination are to be considered, Such as AV, AE, AD, BY and CY. These combinations acetaken from the T* row and 1* column of the above table, These combinations contain costlier and vital items which are taken jai account for planning inventory of those items which comes under this category 3. Category 2 Category includes combinations such as, BE, BD and CE. The combinations consist of E and D classes for B lass items nd B and C classes for E class items, Combinations BE and BD corresponds to medium cost items and combinations BE and cE coresponds to essential criticality items. These medium cost and essential criticality aspects are taken into account during, the process of inventory planning of the items which comes under this eategory. 3 Category 3 Category 3 has only one combination which is CD. This combination is related to the items which are less costly with desirable criticality Therefore, classification of combinations into categories assist the management in taking decision concerning material policy and expected service levels in such a way that the complications in managing the inventory are completely swiped off; A jul mix of inventory policies should be adopted in order to reduce the total cost of inventory system and to meet critiealities ofthe items. az7. Compare VED Analysis with ABC Analysis. 4 ete ‘ (Moray, So, Ga) ApiNay14, Sat 03a) Apa 12 Set at) eee ogee ‘The following are the various differences between ABC Analysis and VED Analysis, "ABC Analysis ‘VED Analysis Tn ABC analysis, the items are grouped depending on | 1. [In VED analysis, the items are grouped consumption value of the item. » critical nature in the production. The items in ABC analysis are classified in three categories | 2. | The items in VED analysis are also classified ie, A, B and C. -ms have high annual consumption categories i.e., V, E and D. V-items are n ‘Value whereas C-items have low annual consumption and whereas D-items are not critical and E B lies in between A and C. between V and D. “These tems are classified in descending order based ontheir | 3. | These items are classified based on ‘control usage value. production, * Service levels of inventory in ABC analysis inerease from | 4. | Service levels of inventory in VED» AoC. Bien y In ABC analysis, close control is needed for inventory | >- In VED analysis, close control items which have high stockout costs and those which age |_| which are very important i responsible fora lage fraction of the total inventory value production if hey cia “The A clas items are under constant and direct vision. So, they can be maintained in smaller quantities in inventory, ‘the service level will be low for this class of] -C class items is Very in large quantities ‘willbe high for The total annual consumption value of less, The maintenance of these items does not effect greatly, so the: service level3.5 E0a mopeEL 28. Define and explain EO. Explain the significance and limitations of E0Q formula, oR Explain the significance of EO@ formula. What are its limitations? (Refer Only Topics: Significance of EOQ Formula, Limitations of EQ Formula) Answer Economic Order Quantity (EOQ) OQ stands for economic order quantity. EOQ is also known as optimum quantity (or Q Opt). EOQ is the optimal order size in which the total cost consisting of ordering cost and carrying cost is minimum, EOQ isan inventory control method used by inventory managet to determine the optimum order quantity -Apnintayet7, St, 0M) When to place an order and how much quantity should be ordered are the two problems faced by inventory manager ‘while controlling the inventory. The use of EOQ method helps in solving the problem of how much quantity should be ordered. In the fixed order quantity system of inventory ‘management, the items are ordered when the stock of items i the warehouse reaches the reorder level. Ordering in bulk quantities reduce the number of orders and thereby’minimizes the ordering cost. But the carrying cost involved in handling such bulk quantity of items is very high. On the other hand, ifthe orders are placed in small quantities, the numberof orders tobe placed will be more which thereby leads to high ordering cost. The carying cost involved in handling small quantity of items is very less when compared to the handling bulk quantity of tems. ‘The main objective of inventory manager isto determine the ‘optimum quantity at which the carrying cost as well-as ordering cost are minimum, The following figure depicts EOQ or optimum quanti ae Figure: Economic Order Quantity, From the above figure, we can observe thatthe economic order quantity is 30 units. The point at which the carrying ost curve and ordering cost curve intersect each other denotes the least total cost and the quantity associated with that least cost is considered as optimum quantity (or EOQ), Look for the SIA GROUP The imp prved in the helps in red faowing points: seing total costs oF inVentony, | ed recommendations fegardy hight! 0Qh 2 I rove ants per order ie nib vnessmen to take advantage of Sieh 2 aonviges information 10 the Businessmen a 5, Ithelps to determine optimal inventory, ‘will help the businessmen business whieh ‘customer demand and mi Limitations of EOQ Formula ‘The limitations of Economic Order Q highlighted in the following points, @ mize mventory: uniform in practice. In such situations fluctuations, the FOQ concept loses its ¥ ii) make partial shipments. Under such sit model cannot be applied. A dav ii)_The ordering cost is difficult to m linearly related to the number of © calculation becomes invalide as (iv) The inventory carrying costisanet cannot be estimated accu to implement the stock poliey a () One of the assumptions3 toventOry Management ewe! ot ‘he EC mas of OQ Formula The rele jhe onder placed and order received {rough out the period), se ordering cost does not Vary. pee is absence of quantity discounts, aa Technique for Determining EOQ ze whit sonic Ta aati) ry cal x optimal order size (Q*) Tagleost 1c e Economic Order Quantity Figure soning two methods, 1, Tabulation method 1. Tabulation Method cies the following steps, I) Choosing the number of lot sizes for Purchased lot, Ascertaining the total cost for each I ‘adding the carrying cost and 3 method is based on various assumptions which annual demand of the product remains constant. ‘pe cost per unit of the product remains the same. +509 (Economie Order Quantity) isthe optimum order + minimizes the total carrying eost and ordering Cost. jer quantity, “order quantity” refers to the amount purchased or produced during the production cycle, Inthe graph below, it can be seen that for an increase ore ize) the carrying cost increases and ordering cost cases. The total cost curve represents the sum of ordering “ing cost for each order size. The order size at which cost is minimum is called Economic Order Quantity ‘Cerryng cost Economie order quantity is determined with the help of 2. Algebraic or Analytical method. The determination of EOQ under tabulation method oy : Ascertaining the average inventory carrying: 1) Ascertaining the total ordering cost for the orders placed. 2. @ () atime remains constant (i.e. the time lag between | () remains same @ © f) @ purchases, ‘cost forthe | « jot size selected by cost. depends on the followit inventory cost occurs where, “nalytical Method £00 formula under analytical Tigebrate oF A\ es ‘method ‘The derivation of ing assumptions. Inventory shortages are not allowed as whenever {he inventory attains zero, it is replenished: ‘The products are produced or supplied immediatly. ‘The lead time is ‘zer0". Inventory carrying cost is denoted by C,=C, Where °C is the unit cost and ‘7’ i the inventory carrying cost Pet ‘unit per year. ‘The set up cost per production/procurement cost is denoted by C, “The figure given below is an inventory time diagram in ‘which quantity is shown on vertical axis and time on axis, The total time period is divided into n parts. Figure ‘The most economic point with regard to the total | Inventory carrying cost = Annual carrying cost (SetupQn{ Be a@= 5% +5 fe But the total cost is minimum when the inventory ots Optimum number of order, pes Optimum order interval, 7, ~ = indays = Lin year or (7,)= 2 “. Average yearly cost, Tc = y2C,DC, oR TC = Annual ordering cost + Annual holding cost + Total purchase cost 1c = 2. Q ee a Q30. What do you understand by the term “Economic Order Quantity”? On what factors does it depend explain? Answer : Economic Order Quantity (E0Q) + 2¢,+Dxe April-t8, Set-1, 03(a) Economic order quantity refers of the amount to material tobe ordered to make the best use ofthe firm's resources, taking, into consideration factors such as shelf fe of the mater required and space available for warehousing, price bréaks for ordering quantity etc Factors Influencing EOQ ‘The performance of the inventory system and the process of arriving at economic order quantity involves cértain costs which are described as follows, the actual price p ts 01 independent oft with the cost of plc iss de suppliers ot it strom outs Tithe items are produced by cr ordering generally ing of invoices, jated includes cost of mailing, ‘sé fice which va Ci) ahr low uP SiON iy, Material handling costs inet and storing of Ordering, cost is in ith the num rather it varies Wil ua ftime, Thus ifa large number of oF ‘vill be required for purchasing the items. (©) Holding Cost af ‘ It is also called as carrying cost. It is holding inventory carrying, cost and is. the order size. The factors are: ‘Storage cost incurred for providing @ store the product: a (ii) Insurance charges against possible loss fro i forms of damage it (iii) Handling cost:incurred by paymient employees for handling inventory. (iv) Interest paid on investment. © (v) Obsolescence and deterioration: parties of the inventory become detoriated by natural causes. Shortage Cost“ith the concept of vario mi onder quay 2 hat quantity, where ordering cost Sentry corying ome are eA ee nur (inizoum) ordering cost Cairying cost High Low Low wiecan nether ELA ER LOE Hes .ntory carrying cost. Therefore, we have to strike @ bar besween the £0 Where we haye to order a quantity so ‘aaah the costs are optimum. The relationship is indicated ES {t. Define the following terms, (2) Order point (0) Lead time (@)_ Reorder level (d) Maximum stock level (@) Minimum stock le (Safety stock (g) Service level (h) Average stock level. Answer = (a) Order Point Order point is generally considered as the quantity which ‘be placed to replenish an item. The : indicates that an order must crder point may be in the following form, Order point (OP) = Lead time * Daily usage (o) Lead Time for consumption during needs and its fulfillment. This ‘Thelength ofthe lead time depen There are two types of lead time. Reorder Level period © The inventory level at which Placed with the suppliers for obtaining 8 reorder point/level. This poi Stock and minimum stock level: They are (i) The lead time between th actual receipt, and Ki (ii) The demand during the lead times inventories of raw materials and components are held the period between the recognition of is called “Lead Time”. ids upon the level of inventory, ‘a new or fresh order is additional items is known tis fixed between the maximum 's. This depends on two factors .e order placement and “This is the quantity of the Fep) types of inventory control system, the ‘economic order quantity (a) Maximum Stock Level the maximum desi tock. This is used too high. ‘A stock level selected as tl allowable stock is referred to as maximum s avin indicator to show when stock Tevels have risen Minimum Stock Level 's the amount of inventory that organizational needs. fay act as © Minimum inventory i ‘every firm has to maintain to satisfy the Tinventory falls below the minimum level, then itm ‘hindrance in the process of production. ‘Minimum level of inventory can be explained as, Safety Stock © “The safety stock is defined as the mi inventory to serve as a safety margin to meet #0 increase in usage resulting from various imreal life situations, firms operate under conditions of uncertainty relative to both the demand as well os ‘procurement caeervatal actual demand may be more or fess than the forecasted demand. Similarly, actual procurement time may. vary from the estimated time. In order to minimize the effect of X20 Msnty in demand and/or ead time, a firm maintains safey stock, (g)__ Service Level Service level is considered as the probability of = stockout. The uncertain demand causes due to the possibility ofa stockout. An effective technique to reduce, stockouts is £9 hold additional units in the inventory: " a (h) Average Stock Level ‘Average inventory is calculated by taking inventory and closing inventory. Both these amounts are: nd then divided by 2. The result will be the average i Q32. If a product is to be ‘company, the details are as ‘Annual demand rate Production rate = 48000 units Setup cost = € 200 per set —__—~—— ENGINEERING STUDENTS:PRODUCTION Fo —oeamay 160 ‘Solution + Given that, ‘Annual demand rate (D) = 24000 Units Production rate (K) = 48000 units Setup cost (C,) = € 200 per setup Carrying cost (C,) = € 20/unit/year. (a) Economie Order quantity (OQ) 2 26, BOO" G, __ [2200x2400 20 = 692,82 units (approx.) () Cycle Time We have Economic batch quantity, git tes fea 2, 0° = Vea= DIK) _ ex200%24000 aol) a) 48000, 200! _ [9800000 200.5 EBQ, O* = 979.80 units 4 From “manufacturing model without shortages” (Model of inventory), we have, iowa = 0.0204 year = 0.24 months (“ 1 year= 12 months) Also, period, 1,4= mee apis 48000 = 0.0408 x 0.5 we, 24000 4 snonth (1 yea +, Cycle time = 1," +1," “20244024 8 9 = 0.48 month.) Look for the SIA 'Inventory Management ‘apni, Set, 4a) Annual Demand, D = 75,000 units/year Ordering Cost = 800 Cost per unit = 12 Carrying Cost 15.4% of the unit price 12 15.4% 120.154 1.848, i cot Tie esos OQ (Economic Order Quantity) 26D £0Q = ~ A ~ 8058.29 @ 8058 units Lead Time Consumption cnual Consumption (12 month consumption), 75000 units 2 1 ead Time = 2 weeks means — month (i.e 0.5 month). 2 Constimption Time i sini 75000 <—o 12 months 2 0.5 month 7500005 2 05 3195 units Lead Time Consumption = 3125 units. (ii) Optimal Operating Doctrine hia ne optimal operating doctrine is to order 8.058 units when stock 34. Mis Kobo bearing Ltd. is committed to supply 24,000 bearings per annum to Mis D daily basis. It is estimated that it costs 10 paise as inventory holding cost the setup cost per run of bearing manufacture of ¢ = $24. (i) What should be the optimum run si (ii) What should be the interval betw (iii) Find out the minimum inventory hi jolding cost? Solution : ). Given that, ‘Annual demand rate (D) = 24,000 (i Setup Cost (C,) = 324 , Holding/Carrying Cost (C) 0 pains (070 812) Ohi etna aa6 @ Optimum Run PRODUCTION FP" tne $24,000 tt Boom fee a Vo O0.10%12 es (ii) Toterval Between Two Consecutive Optimum Runs £09 3,600 ; BP «365 = 600-365 54.75 = 55 days (ii) Minimum Inventory Holding Cost Cost)] x Holding/Carrying [(Annual Demand Rate/EOQ) « Setup Cost) + (Average Inventory pa * HO [[Bas2+-(2}-co10-29] 2.160 + 2,160) = 4,320, the requirement of 235. ABC manufacturer's produces 125,000 oll seals each year to satisfy the reahizemie 6 They order the metal for the bushing in lot of 30,000 units. It ce bigahay ary cost of bushing Is $ 0.12 and the estimated carrying cost is 25% ut is required so that quantity. What percentage of increases or decrease in order quantity is req quantity is Economic order quantity? Solution : Given that, Demand (D)= 1,25,000 ol seals Ordering Cost (C.) = 40/order Carrying Cost (C,) = 25% of unit price Unit Price (P) =$ 0.12 per unit ube ge ‘OO ahisga = 33,33,33,333.33 Maa: 5 a neg = 1825742 18,257 unity, fa — Since the manufacturers order the item at a . quantity 0f 30,0 order quantity to reach EOQ is zy Percentage of Decrease in Order Quantity7150 per order. The UNIT-3 Inventory Management i) The economic oF a6. A company requires 10,000 units of an item mum, The cost om panY saying ost Is 30%. The unit price of the item Ist 12 Reantity fi) Optimal total annual cost (ii) Time between the orde ‘Apriuntay-19, Set-t, 0418) solution © Given that Annual Demand (D) = 10,000 units ‘ Ordering Cost (C,) = 8150 per order Carrying Cost ()= 30% Unit price of Kem (P) = © 12Amit i009 36 x12 (Economic Order Quantity BOQ 913 units, OQ = 913 units (i) Optimal Total Annual Cost Optimal Total Annual Cost = 10,000 59 4 = 1.000 150+ 245 «3.6 + (10,0012) 1642.5 + 1643.4 1,20,000 1,23,286 (ii) Time between the Orders ‘Time between the orders in days = 9-365 daysiyears 913, 10,000 *65 = 33.32 days. The time between orders = 33.32 days. 3.6 INVENTORY CONTI Q37. What are the various systems: available for inventory control? Explain. OR What are the characteristics of fixed order quantity (Q) system? Mustrate with f (Refer Only Topic: O-System) ( 1 Explain P and Q systems of conts (Refer Only Topics: P-Systes Answer : “The various systems available for inventory control ae, 1. P-system (or) Fixed order period system") 1.) nt atieans hi Q-system (or)Fixed order quantity system ee i Hybrid system. at yANY— PRODUCTION PL! lic review such as, periodic mf Sytem erent names such 3 Fed at fixed period, is known by diffe ie orders Ate Pee der quantity P-system isan inventory contro! method. P-system rst BSE ee, he ore Gey ene eid sem pri ye or ard 8 at IN emai te Se i gre guy varies ord ore depending on he Mert te Se guecy fe sane ri fi ed nyo i re it onder perio system, the stock position ofeach typeof item is checked a FENN firm to firm and from one type of material to other type of material of th mi em or P-syster The figure given below depicts the fixed order period system Yaa i j i : z B Xeaxis Time Figure: Fixed Order Priod System or P-system From the above figure itis clear that order period is fixed at point “T” and the order quantity, , Q, and O, represents quantity ordered at different demand conditions (.e., D,, D, and D,). 2 Qsystem (Q-System is also known as ‘Fixed Order Quantity System’. In the fixed order quantity system, a fixed is ordered whenever the stock in the warehouse attains the eorder level. The fixed order quantity « Economic Order Quantity (EOQ). Even though the order quantity remains constant, the order: in the demand of the consumers. The figure given below depicts the fixed order period system, Yeaxis ait From the above figure, its clear that the quantity Nenad upon the demand in the market. D,, Dy D, and Dy dema3 Inventory Management unr system is also called ag wo. inventory items are divided into two bins, Initially, the stock is issued from the frst bin, an order is placed for the stock to fill the first bin. Till the ordered stock 4 used. TWo-bin system is suitable forthe situations in which the demand is constant and lead time o 3. Hybrid System 3 ‘The hybrid systems of inventory control i the combination of P-system as well as Q-system, The two commonly used tid systems are, hy’ (a) Base-stock system and (b) Optional replenishment system. (a) Base-Stock System In the base-stock system, the order is placed for restocking the materials whenever the issues are made to the product departments. The quantity ordered for restocking will be equal to the quantity issued. A one-for-one replenishment policy is followed in base-stock system which helps the firms to maintain the inventory at the base-stock level. Base-stock level isthe sum of the estimated demand (during the lead time) and the buffer stock, Base-stock system is suitable forthe costly items like engines for airplanes. The base-stock level in the base-stock system is equal to the reorder level in the Q-system ‘or fixed order quantity system. The base-stock system is applied in JIT (Sust-in-time) systems. (©) Optional Replenishment System 2 Optional replenishment system is known by different names like, min-max system, optional review system and (s, S) system. Most of the features of optional replenishment system matches with the P-system. In the optional repleni system, the inventory levels are reviewed at fixed time periods and the order is placed when the inventory level reaches the predetermined level to meet the desired needs. The reorder point in the Q-system is equal to minimum level in optional replenishment system, The optional replenishment system is suitable forthe situations in which the ordering cost and reviewing costs are high as review of inventory level is not an ongoing process in this system. 38. List out the advantages and disadvantages of P-systems and Q-systems. Answer ! Advantages of P-Systems t Some of the advantages of P-system are as follows, 1, The use of P-system helps the firms to obtain attractive discounts from the material suppliers as sales are assured order period system. x ‘ P-system involves less inventory and ordering costs. “ P-system is suitable for the materials having seasonal demand and the materials whose procurement has to based on the sales forecast. paar Disadvantages of P-Systems ‘The following are the disadvantages of P system, 1. Ordering only at fixed period might not be efficient, as there are chances of sudden inen percentage of consumption. pePee 2. -Asthe P-system deals with periodic review system the inventory manager gets overburdened around the review dates. co Each item has an optimum order quantity based on its price structure, usage rate and the items should adequately match with the limited number of ordering cycles, the ‘economic order quantity in this system. avid Advantages of Q-Systems . The advantages of fixed order quantity system or Q-system are as follows, © | = Q-system helps in acquiring the materials in optimum quantity. Aly stem helps the inventory managers to place the orders forthe ite the inventory and maintaining the total in and minimum values, The use of Q-3y Q-system helps in controlling controlling the planned maximum208 3.30 PRODUCTION PLAT Disadvantages of Q-Systems Q-system has certain disadvantages, which are as follows, 1 In the Q-system, it is very difficult to order all the inventory " 2. The varying order periods may cau snce to the ore e 3. Constant demand and fixed lead time are the two main assumptions °° yery diffe set which a new economic order quantity and new order point has w0 DESCENT vi hed there are chances of the order hich stock out situation arises, ifthe demand and lead time, hall It task: ne chances of supplier dei ordered, th 4. When the lead time is more than the time for which quantity i8 or all the orders at one period of time ky ier minimum ste As BOQ provides an order quantity which ess than the supplier IT reaching the reordering level and getting unnoticed by invent ai Differentiate between P-aystem and Q-eystem. Also explain thelr Crile oR Compare P system and Q system type of inventory wit OR Write any seven differences between P and Q systems. s (Refer Only Topic: Differences Between P-Sistem arid Q-Systen) Answer : Differences between P-System and Q-System The various differences between Q-system and P-system are listed down in th h applications. following table, ‘Qsystem ‘Q-system is also known as ‘fixed order quantity system’ 2. | The order quantity or order size remains unchanged in Qesystem 3. | in the Q-system, the materials are ordered when stock attains the reorder point or reorder level. 4. |In the Q-system, the record is updated when the new | In the P-system, the task of record stock is received and when the existing stock is issued to | to review period. P-system is also known as ‘fixed-order ; Vi ‘The order quantity or order size differs from another order in P system. production department. 5. | The quantity ordered in Q-system is comparatively lesser | The quantity ordered in the P-syste than P-system, . 6. |n Q-system, adequate time will be available with the | In the P-system, the inver inventory manager for maintaining the records ‘maintaining the records due 7. | Under Q-system, the period of order varies depending | Under P-system, the ord upon the demand or percentage of consumption. " 8. In the Q-system, the fixed order quantity is equal to EOQ or optimum quantity. the optimum quantity. system is suitable forthe items having regular demand. ee Applications of Fixed Order Quantity (Q-System) ‘The fied order quantity is usualy applicable under the following situa 1 When the cost of the stock is high. “ is also high. ‘When the discounts are fixed on the basis of order quantity, ‘yan When the items have fluctuating demand pattem in the market, When the items haye to be ordered from different sources and Look for the SIA GROUP L The cost of item stock-ou Yan3.31 ntt-3 Inventory Management subset bins ae 6) 641 A aE ee > osu ns a i al ‘The process of MRP-II includes the. nt of a production plan. rom production of each month for each product line for next one to five years,Engineering Manufacturing chasing (process and merits apecity | | (vendor orders) desi) « “ product desis Material requirement an Master production Production schedule ! Figure: MAPLI: An Integrated System for Planning and ee is develo The production plan influence all other functional departments, $0 Li Nae me plan” fr operations. The prodetion department mst POEOS That ela te race earnest mist ove Mae which becomes their “g department need to sell ‘master production schedule which is supported by production plan, developed E At this situation, itis examined that whether the available capacity is suficient to sustain the proposed mass noi. Iso, ether the capacity or master schedule need to be changed. Then master schedule is used for the PUEPOSE {hui materials requirements and priority schedules for production. A detailed analysis of eapacity requiremets it capacity adequate for producing the specified components at each work center during the specified time periods: not adequate, the master schedule is changed to indicate the limited available capacity. A capacity-feasible schedule is created which focuses on shifts to implement the plan. Purchase s schedules are developed. These schedules are useful to determine work center loading, shop floor control and activities to make sure that the master schedule is met. 47. List out the differences between MRP-1 and MRP-lI, Answer : The differences between MRP-I and MRP-II are as follows, MRP-I or MRP dink ce -1 or MRP is a computerized information system of | MRP-II is an extensi ‘of raw materials, for the different operations involved in | department, production or manufacturing of a product. It mainly focuses on raw materials including CRP (Capacit Resource Planning) with respect to time, Say Itissimple and easy in nature, but does not provide any useful and integrated information of MRP-1, 1, as information, aspects of bate | as represented and followed asa complete single system, na of Resin ita ‘oun a concem instead of ‘being a part and pares ofthe and whole system.ae NIT-3 Inventory Management wh - = Tris being.implemented by many ofthe manufacturin Timpani byonja ow mancioTN NON apes nd important in providing foanaging information system at different levels. concept. Rp isthe part of MRP-IL Ro HTN OT ig ah : _ |r also facititates in providing the inior® voce not provide ny information about nancia resources | er ee personnel an! labour budgets 1 ae tesurees, personne needs and abou DSSS jamental coordinates and combines sales, purchases, .e fundamental | It coo! rdinat Phe ty finance, accounts, engi t {I designed and well defined production se ofa single database, to plan and alter the changes in the activities of the system. fh both production planning, as well as atic manner. It focuses or highlights only on thre‘ cements, They are, inventory levels control, preference capacity to load production system. manufacturing, implementing we plans and makes us equi to operating level, Itis concemed wit financial planning in a system: MRP-I has been expanded by including CRP and witmately MRP-II has been formed which takes into ‘consideration all the resources of the or itis concemed with production planning only. ». | MRP-1, thongh one of the best techniques for managing inventory, lacks behind as it does not take into consideration the other resources of an organization 3.8 ENTERPRISE RESOURCE PLANNING (ERP) 948. Explain about the concept of ERP system. Answer : ‘ape, Set-2, OF Enterprise Resource Planning (ERP) 10 the business processes of a ‘manufacturing planning is a recent concept which provides support vial rote in integrating the different areas of an Jn in tum enables the manufacturers Enterprise resource snd distribution enterprise. Since, itis a software-oriented approach, it plays “onrization so as to ensue smooth and consistent flow of erica information between them, whicl spond quickly tothe service needs of customers. Features of ERP TThe salient features of ERP are as follows, 1. Accommodating Variety Both multilingual and multi-curency capabilites are provided by the ERP software solution. The abilities, compete and succeed globally are provided by multi mode manufacturing and multi-facility. 2. Seamless Integration The combination of new product introductions or changing the existing products completely into the en cemed “engineering change management’. The reengineering change management must involve electronic ‘hange order process routing, reision-level control and automatic generation of product structures; esi 3. Supply Chain Management End-to-end supply chain management is important for enterprise which possesses multiple m di a eas eke Intelligent Resource Planning (IRP) is used to effectively utilize the overall flow of d data and to develop relationship between different act ivities to effectively determine the demand supply chai 4 Resource Management In order to have effective management of equipment, resources on line records orequipmentl recorded and appropriate accounting methods must be followed in regard of operating costs and maint package provides various functions to effetively organize the human resources, functions sueh ‘of employee data base, applicant tracking, performance review, cost benefits, career and successi 5. Integrated Data Model gti The main objective of any ERP systems is o develop an integrated data ‘model whic ahove the whole enterprise system specifically provided for information for emplo me 49. What are the steps involved in implementation of ERP system: SO— ene ERP system on board tn broad perspective, the managerient of tl 1 ron ee ries for business and where the RP js actually in the organization, nine the necessity 10 have Step-2 examine the reinessor organization for impleme land attitudes of the people in the organizations Step-3: Evaluate the costs need to be incurred in installing ERP. ‘on a long-term basis and whether management is ready to bear ERP or not Step: ERP impleme xd to be organized by selecting people within the organizations who ean communicate with the Consultants of the ERP software vendor. Specific roles and jobs ‘must be assigned to those people. Step-5: Both old and new processes must be assessed and recorded. Process mapping and modeling helps to assess the possible outcomes. Depending on it, the new process can be revised further. Step-6: The software and the vendor or its representatives rust be selected who can perform the desired job. It includes following parameters. (2) Both the software and its vendor need to be present globally and locally . (b) The type of industry which the software tries to target. (©) Software packages become obsolete or outdated, (4) Theprice of package and cost of implementation changes from one package to the other. e) The ability, experience and attitude of the vendor or its local representatives who communicates with the organization while implementation. )Afier-sales, service or support must be provided by the vendor or its associates Step-7: AA detailed plan of implementation must be prepared which must include, () Formation of a team for implementation, ») Training co team members. ©) Mapping the business processes on the package, (@) Deciding where customizing is required. (©) Schedule for the test runs and training to the user, jementation ‘ERP implementation areas follows 1. Examia It is ¥ l ignificant changes in es. For pro 1d business process rv emeniation, ERP vendors e firms in ERP implement certain best practice he option of using the .d modifying their proces .s and developing @ connects 4 the firm implementing ERP jonal structures ar organizational directiontol treated a software around The organizations may have # te a Ramework for operating aM sutlining their business processes according to it. Acom by many companies. 3 2, Selecting Modules for Executing ‘Thisisthe second tep involvediin the ERP imp! in which the ERP modules that need to be imp selected. While selecting. ERP modules, the firms $ consider the processes having biggest impact omic relations, the processes*which obtains maximum from cross functional or inter-organizational the processes which need to be standardized organization, Small-size and mid-size market 0} were finding difficulties in implementing ERP, vendors such as SAP has developed a rapid. implementation. On the basis of the processes and which were successful in the past, SAP di specific best practice templates. These te mainly developed for maximizing efficiency : customization, 3. Aligning Sophistication Level _ Determining the sophistication Ie ‘business is one of the most essential QAD (for Quality, Applications, PRO and eQ software for manufé international clients. The i imple when compared to its software to individual p financial, distribution and ey used by international for invoicing, accounting 4. Settling In this step, implementation, ERP ihe are now using lor organizes mid-size market ‘bination of these approaches 18; palUNIT-3 Inventory Management with Pxter = Gonnee riers The benefits obtained from e-business depends mainly nthe capacity of the firm to consolidate its internal processe: ony external suppliers, customers and organizations, The first ation ERP systems do not have the eapacity to interact with zation, With other ERP systems, e-business The second generation of ERP we helped the vendors to develop web centric systems by nie access from different 1s. Many new powerful analytical tools and applications sting data and obtaining dyna were also developed by software vendors for exploiting on afiastructure of ERP. These softwares include Customer Relationship Management (CRM), Supply Chain Management SCM) and Collaborative Product Commerce (CPC), ppffcetive Implementation of ERP For avoiding failur lowit ERP implementation, the firms tivities, 1, Change the Attitudes of the Employees cfiective implementation of ERP, the employees the ways in which they perform their, jobs hhenwise, software will act as an obstacle towards the smooth the bus 2. Enhance the Policies and Procedures ERP does not give rapid and immediate results to the s. I is @ transformational process which requires two to nree year for producing effective results. So, the firms should expect gradual transformation and must enhance its polici stems, procedures and methods of transacting business with ERPas an enabler,” 3. _Introspeetion/Self Analysis Effective implementation of ERP relies mainly on the amount of introspection or self analysis which the firm does shout its own methods of doing business, Introspection done heforeinsalling the ERP sofiware helps in obtaining effective 4. Providing Training : For implementing ERP effectively, itis very essential for the firms to train its employees. Training should be given to the cmployees for developing the skills in operating and interfacing, the system and also about the new methods of doing things. Customizing the ERP Software 7.) acess « ) © 1 6 software so that it suits with the organization’s current methods of doing things, i Q51. Explain the scope of ERP and difficulties in implementation. o sind pat A Me 4 cree sinaipe tl at Explain the difficulties faced in in Many organizations also change or modify their ERP/| er ts por, 804,040) ‘Anawer # Scope of ERP management, asset management and enter management, plant maintenance, qilality management, project management, sales and distribution management. training and development and skills inventory. @ flexible assignment of tasks and allot responsibilities 1 locations, positions, jobs, groups or individuals Difficulties in Implementation of ERP. while implementing ERP applications. Some of the major issues, are as follows, i 7 3.4t Apriiinay-16, Seth O40 TIRP has wider scope and it covers the following areas, nance ca deals with financial accounting, treasury, This prise control Logistic Logistic deals with production planning, materials Human Resource Human resource deais with personal management, Work Flows Work flow combines the whole organisation by providing Companies experience several difficulties or problems ERP implementation involves many complexities i terms of technical, social and organizational facets “There isa high rate of failu-- > ERP implementation. ‘The failure of implementation o in bankruptcy. 7 strategy and culture, wh arrangements of the orga Eventhough the ERP: is difficult to stand:AN! 3.42 PRODUCTION PLANNING Answer * Favmay ee oWo) | AMEWEE! og Line of Balance (LOB) Supe ove OO vento LOB is an evaluation technique which involves charts The steps of L used for analyzing and controlling product and services that | <1 5s are produced to satisfy ti: specific delivery schedules, The | St? acess plan in order to produce one concept of LOB technique is as same as the Time Phased Order Draw the ane te duct structure. Point (TPOP) system and Material Requirement Planning | the product using (MRP) system. The LOB chart represents the quantity of parts, components, sub assemblies, major assemblies and end products which are produced at every stage and at the review date. Through LOB technique, both the desired progress and the actual progress can be determined. ¢ of Balance (LOB) re the objectives of LOB techniques, To control production activities. Objectives of L The followit ‘To analyze the jobs progress at regular intervals. To make comparison of actual progress with that needed to satisfy delivery requirements. 4. To look for the operations in which the progress is not satisfactory. 5. Toact as a project management aid. Significance of Line of Balance (LOB) ‘The following points highlight the importance of LOB technique. The significance role of LOB ean be understood from, the following points, 1. Line ofbatanceis considered to be an appropriate technique for finding out the complete status of various process stages that are involved} ~anufacturing a product. 2. It is a technique used in production control and scheduling to determine at a review date, the quantity ‘ofan item thatshould have passed through the previous operation stages by that date, in order to ensure the completion of the required delivery schedule. 3. It is a computational and charting technique for controlling and monitoring products which are made to mest specific delivery schedules. 4, Itstechnique of monitoring and controlling can be useful insingle batch production of an important produet which is to be delivered at different calendar dates in different numbers. Through the LOB method of control, the project manager can ensure thatthe production activities are in balance, Q53. Explain various stages in the process of LOB technique, State its advantages and applications. oR Explain Various steps of line of balancing technique. (Refer Only Topic: Steps Involved in LOB) (Apritt8, Se-4,Q4(o) | Apil45, St-t, 4a) oR Explain the technique of line of balancing process, (Refer Only Topic: Steps Involved in LOB), siop2 aa ulative delivery schedul onstruct a umm very $6 ai g cummulative delivery construct the correspondin graph Step3 ofthe cummulative delivery By the side i ‘chart for a given time peried. construct a progres. Step 4 rind the status of completion for each process process stage is the final stage go to step 4(@ else go Step 4(a) Draw a vertical line in the cummulative delivery ‘graph through the period of review intersecting the cum “delivery schedule curve. ‘The point of intersection shows the expected number of units to be produced. ‘Now, draw a horizontal line from the point of stage under consideration in the progress chart. 1. Inthe progress chart, ifthe horizontal line tip of the vertical strip relative to the interest, it specifies that the process stage excess cummulative number of units than re that point of time. a 2, Inthe progress chart, if the horizontal tip of the vertical strip relative to the pr interest, it specifies that the process stage’ ‘exact cummulative number of units which. at that point of time. ol 3. In the progress chart, if the horizontal the tip of the vertical strip relative to t Stage of interest, it specifies that the p produced actual cummulative units less t cummulative units to be produced in that atthat point oftime, Step 4(b) Add the lead time of the pisces of ‘add the lead times of several other process stages between the process stage of interest, Also.add thet! Stage of the product to the period of review, Let ber. z : lesb