O&SCM Unit 3

Concept of KANBAN
 Kan=Card
 Ban= Signal
Card system that controls production and inventory.
Kanban was developed by Taiichi Ohno at Toyota.
03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 1

KANBAN Signals

Types of KANBAN
1. Raw Material Kanban: Tells suppliers when to send how

much of a particular item to a particular place
2. In-Process Kanban: Determine the amount of WIP that can be
kept between any two operations in a process.
3. Finished Goods Kanban: Number of a products to be kept on
hand at any given time.
4. Emergency Kanban: cards are used when something requires
immediate attention. This may be anything from replacing a
defective part or suddenly needing more materials due to an
increase in demand.

Determining the Numbers of KANBAN

Suzie Sizewick works for a manufacturer of ballpoint pens,

which come in packages of five pens each. Her job is to fill the
packages with pens, and she is expected to process 100 packages
an hour. The facility where Suzie works uses a kanban
production system in which each container holds ten pen
packages. It takes 15 minutes to receive the packages she needs
from the previous workstation. The facility uses a safety stock of
12 percent. How many kanbans are needed for the filling
process?


Jordan Tucker works for a production facility that makes aspirin.

His job is to fill the bottles of aspirin, and he is expected to
process 200 bottles of aspirin an hour. The facility where Jordan
works uses a kanban production system in which each container
holds 25 bottles. It takes 30 minutes for Jordan to receive the
bottles he needs from the previous workstation. The factory sets
safety stock at 10 percent of demand during lead time. How
many kanbans are needed for the filling process?


Benefits of KANBAN
1. Provides quick and precise information

2. Provides quick response to changes
3. Avoids over production
4. Minimizes Waste
5. Maintains full control
6. Delegates responsibilities to workers

Just In Time
JIT is an all-encompassing philosophy that is founded on the

concept of eliminating waste.
But JIT considers waste anything that does not add value—
anything.

THE PHILOSOPHY OF JUST In TIME
1. Eliminate Waste: That does not add value

2. A Broad View of Operations: Work for same company goal
3. Simplicity: Simple the better
4. Continuous Improvement:
5. Visibility: Problems must be visible to be identified and
solved.
6. Flexibility: Adapt to changes in the environment.

JIT Action Areas
1. Develop People: Increase skills and productivity

2. Eliminate waste in all areas
3. Optimize materials handling and production flow
4. Increase Quality
5. Improve Continuously

Six Principles Related to JIT
1. Reduce buffer inventory.

2. Try for zero inventory.
3. Search for reliable suppliers.
4. Reduce lot size and increase the frequency of orders.
5. Reduce purchasing cost.
6. Improve material handling.

Production Planning & Control
Production Planning:
What, How much and When to be done.
Production Control: To get optimum performance from the

system.
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03/14/24 14
Unit Number:3
Types of Production Planning
1. Flow Method: The product is manufactured by a number of

collective operations in which materials move from one stage
to another without time lags or interruptions.
2. Mass Production Method: Producing a large number of the

same items in a short period of time.
3. Process Manufacturing Method: is characterized by the

continuous flow of materials through the production line.

Types of Production Planning
4. Batch Method: Batch production is used when items are

produced in groups.
5. Job-based Planning: The type of jobs that fall under this type
of production planning can be on a small scale, such as
creating a customized piece of jewelry.

Process of Production Planning and
Control

Steps in Production Planning
1. Planning:
2. Routing: The exact route/path or set of operations the
materials go through is known as a routing. Finding optimum
routes that reduce wastage and promote continuous flow is a
part of production planning.
3. Scheduling: The machines, activities, and workers are
scheduled to do tasks that are a part of the production plan.
4. Loading: Loading here refers to overloading the production
line to see how much it can handle.

Steps in Production Control
1. Dispatching: it’s time to implement by dispatching items in

and out of the production line.
2. Follow up: Follow-ups are done by supervisors to eliminate
any bottlenecks and ensure that things are going according to
plan.
3. Inspection: To verify that the materials are being processed
correctly.
4. Correction: The results from other steps in production
control are reviewed and corrections are made where
necessary.

Master Production Schedule
The master production schedule is an anticipated production

schedule and is typically stated as specific finished goods. It
details how operations will use available resources and which
units or models will be built in each time frame.
The master production schedule and the detailed sales plan are
reviewed weekly or even daily.

MPS As A Basis of Communication
The MPS is a basis for communication between operations and

other functional areas. It is stated in product or service
specifications rather than dollars.

MPS As A Basis of Communication
Rough-cut capacity planning (RCCP) calculates a rough estimate of the workload placed on critical
resources by the proposed MPS.


1. Ability to make adjustments to fluctuations in demand while

minimizing waste
2. Prevents shortages.
3. Improves efficiency in the location of production resources.
4. Provides more effective cost controls and more accurate
estimates of material requirements and delivery dates.
5. Reduces lead times throughout the year.
6. Provides an effective communication to sales team for
planning purposes.

Aggregate Planning
The purpose of the aggregate plan is to develop production rates

and authorize resources that accommodate the marketing plan and
allow your company to meet the objectives of the strategic business
plan.

Marketing Plan
Marketing plan identifies the markets to be served, desired levels of

customer service, product competitive advantage, profit, and the
market share needed to achieve the objectives of the strategic
business plan.

Aggregate Planning
The aggregate plan (6 to 18 months) details the aggregate

production rate, size of the workforce, amount of inventory to be
held; overtime, undertime, subcontracting, hiring, or firing of
employees; and back-ordering of customer orders.

Aggregate Planning

Strategic Business Plan

Marketing Plan
The marketing plan identifies the sales needed to achieve the

profitability level, the growth rate, and the return on investment
stated in the strategic business plan.

Marketing Plan
Detailed in the marketing plan are the targeted market segments;

necessary market share; competitive focus such as price, quality,
flexibility, or time; expected profit margins; and any new products
needed.

Types of Aggregate Plans
1. Level Aggregate Plan: Maintains a constant workforce and

produces the same amount of product in each time period of the
plan.

Wavetop, Inc., a producer of water ski equipment, anticipates the

following demand for its water skis. Demand for January is 12,000
units; for February, 9000; March, 12,000; April, 15,000; May,
18,000; and June, 24,000. The company has 6000 units in beginning
inventory. Calculate the average monthly net demand for the
company.

Summing the monthly demands, the company needs a total of

90,000 units during the next six months. Since Wavetop, Inc.
already has 6000 units in inventory, net demand is 84,000 units.
The company has six months to satisfy demand, so it must build
14,000 units monthly (84,000 units divided by six months 14,000
units needed per month).

By calculating the amount of production needed each month, the

company can plan the appropriately sized workforce. If each
employee can build 25 units per normal workday and the company
operates 20 days per month, then each employee builds 500 units
per month. To calculate the number of employees needed, divide
the number of units needed per month by the monthly output per
employee (14,000 units divided by 500 units per employee 28
employees needed).

2. Chase Aggregate Plan: It produces exactly what is needed to

satisfy demand during each period. The production rate changes in
response to demand fluctuations.

3. Hybrid Aggregate Plan: A planning approach that uses a

combination of level and chase approaches while developing the
aggregate plan.

For example, January demand is 12,000 units, but since we have

6000 units in inventory, the net demand is only 6000 units. Each
employee builds 500 units per month, so Wavetop, Inc. needs 12
employees (6000 units divided by 500 units per employee per
month) in January. The company needs 18 employees in February,
24 employees in March, 30 employees in April, 36 employees in
May, and 48 employees in June. How does this affect the space
needed, the number of workstations, the sets of tools, and so forth?

When Wavetop, Inc. used a level aggregate plan, it needed space

and equipment to accommodate 28 employees. With the chase
aggregate plan, however, the company needs space and equipment
for 48 people

Aggregate Planning Strategies
1. Capacity Options: They do not try to change demand but

attempt to absorb demand fluctuations.
Overtime, Undertime, Subcontracting, Hiring, Firing
2. Demand Options: Firms try to smooth out changes in the

demand pattern over the planning period.
Back Order, Shifting demand, Off-Season Sale

Inventory Management
An inventory is a stock or store of goods.
Inventory Vs. ROI

Inventory Vs. customer service

Inventory Management
1. Cycle Stock: The amount of inventory needed to meet

expected demand.
2. Safety Stock: Extra inventory carried to reduce the

probability of stock-out due to demand or lead time
variability.

Cost Related to Inventory
1. Item Costs: The item costs of a purchased item include the

price paid for the item such as inbound transportation,
insurance, duty, or taxes.
2. Holding Cost: Determine unit holding costs by examining

three cost components: capital costs, storage costs, and risk
costs.

i. Capital Cost: Rate of Interest

ii. Opportunity Cost: Rate of return the company could have
earned on the money if it were used for something other than
investing in inventory.
iii. Storage Cost: Include the variable expenses for space,
workers, and equipment related to the volume of inventory
held.
iv. Risk Cost: It include obsolescence, damage or deterioration,
theft, insurance, and taxes.

3. Ordering Cost: The fixed costs associated with placing an

order with a supplier.
4. Shortage Cost: Incurred when demand exceeds supply.

Back-Order: Wait till product is available
Lost Sale: Not willing to wait

Types of Inventory
1. Raw Materials Inventory: Extracted materials, Gold
2. Components Inventory: Chip
3. Work-in-process (WIP) Inventory: Items in process

throughout the plant.

Types of Inventory
4. Finished Goods Inventory: Products sold to customers
5. Distribution inventory: Finished goods at various points in

the distribution system.
6. Maintenance, repair, and operational (MRO) inventory: Hand

tools, Cleaning Tools

Inventory Cost
The Total-Cost Curve is U-Shaped

Annual Cost
Q D
TC  H  S
2 Q
Holding Costs
Ordering Costs
Order Quantity
(Q)
QO (optimal order quantity)
Functions of Inventory
1. To meet anticipated customer demand

2. To smooth production requirements: Seasonal variations
3. To decouple operations: Buffers insulate production from
disruptions, finished goods inventory to buffer sales
operations

Functions of Inventory
4. To reduce the risk of stock-outs: Delayed deliveries and

unexpected rise in demand
5. To take advantage of order cycle: Some part of order to keep
for later use.
6. To hedge against price increases.

Objectives of Inventory
1. Customer Service: Ability to satisfy customers’ need,

percentage orders shipped on schedule
2. Cost-Efficient Operations: smooth business, low operation
cost,
3. Minimum Inventory Investment: A company can measure its
minimum inventory investment by its inventory turnover.
Inventory turnover: How many times a company has sold and
replaced inventory.

Objectives of Inventory
1. Customer Service:
2. Cost-Efficient Operations:
3. Minimum Inventory Investment:
Inventory turnover: How many times a company has sold and
replaced inventory.

Inventory Counting Systems
1. Periodic System: Physical count of items in inventory made

at periodic intervals (weekly, monthly).
2. Perpetual Inventory System: System that keeps track of

removals from inventory continuously, thus monitoring
current levels of each items.

3. Two-Bin System: Two containers of inventory: reorder when

the first is empty.
4.Universal Product Code: Bar code printed on a label that has

information about the item to which it is attached.

5. Point-of-Sales (POS) System: Record items at the time of sale

Basic Economic Order Quantity (EOQ)
Model
1. Economic Order Quantity Model
2. Economic Production Quantity Model
3. The Quantity Discount Model

Model
EOQ models identify the optimal order quantity by
minimizing the sum of certain costs that vary with order size
and order frequency.
It is used to identify a fixed order size that will minimize the

sum of the annual costs of holding inventory and ordering
inventory.

Model

Numerical Question

Numerical Question (2000, 5)
ABC corporation has got a demand for a particular part at 10,

000 units per year. The cost per unit is Rs. 2 and and it cost
Rs. 36 to place an order and to process the delivery. The
inventory carrying cost is estimated at 9% of average
inventory investment. Compute the following:
(a) Economic order quantity (EOQ)
(b) Optimum number of orders to be placed per annum

Numerical Question
Sharp corporation purchases 8,000 transistors each year as

components in minicomputers. The unit cost of each transistor
is Rs. 10 and the cost of carrying one transistor in inventory
for a year is Rs. 3 and ordering cost is Rs. 30 per order.
Assuming 200 day working a year. Compute the following
(a)Optimal order quantity
(b)Expected number of orders placed each year
(c)Expected time between orders

Numerical Question
NIIT computer training center in Delhi stocks workbooks with

the following characteristics.
Annual Demand= 19,500
Ordering Cost= Rs. 25
Holding Cost= Rs. 4

2. The Economic Production Quantity Model
.
The batch mode is widely used in production. In such instances,
it makes sense to periodically produce such items in batches, or
lots, instead of producing continually.
Imran Ali AMBA0208 O & SCM

03/14/24 64
Unit Number:3
2. The Economic Production Quantity Model
Q
Production Usage Production Usage Production

and usage only and usage only and usage
Qp
Cumulative
production
Imax
Amount
on hand
Time

Inventory Control Techniques
Inventory control intends to strike a balance between out of

stock and over stock.

Out of Stock:
Financial Loss: Production stop due to unavailability of raw
material.
Non-financial loss: Brand image, loss of customer

Over Stock:
• High Holding cost
• No cash Flow
• No space to stock other items
• Obsolete

1. ABC Analysis
2. FSN
3. HML
4. VED
5. SDE

ABC Analysis
• ABC classification helps in policy formulation.
• Factors like high shortage, holding cost, delivery problems

impact ABC classification.

ABC Analysis

ABC Analysis

ABC Analysis

VED Analysis (Criticality)
1. VITAL: Whose unavailability will stop production

2. Essential: Whose stock out costs are very high
3. Desirable: Mini stock out cost, no impact on production

HML Analysis (Cost Per Unit)
• Items are classified on the basis of unit cost.

1. High
2. Medium
3. Low

SDE Classification
1. Scarce: It refers to generally imported items that require

longer lead times and often are in short supply like imported
items.
2. Difficult: It refers to items that are often available
domestically but are difficult items to procure like items to
be procure from distant places.
3. Easy: It refers to items which are freely available, that are
often procured quickly and locally, relatively hassle-free.

FSN Classification (Turnover of Frequency of Usage)
1. Fast Moving: Regular monitoring

2. Slow Moving: Periodically
3. Non Moving:

ABC Analysis

ABC Analysis

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Concept of KANBAN

Card system that controls production and inventory.

Kanban was developed by Taiichi Ohno at Toyota.

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 1

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 2

1. Raw Material Kanban: Tells suppliers when to send how

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 3

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 4

Suzie Sizewick works for a manufacturer of ballpoint pens,

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 5

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 6

Jordan Tucker works for a production facility that makes aspirin.

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 7

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 8

1. Provides quick and precise information

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 9

JIT is an all-encompassing philosophy that is founded on the

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 10

1. Eliminate Waste: That does not add value

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 11

1. Develop People: Increase skills and productivity

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 12

1. Reduce buffer inventory.

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 13

Production Control: To get optimum performance from the

Imran Ali AMBA0208 O & SCM

1. Flow Method: The product is manufactured by a number of

2. Mass Production Method: Producing a large number of the

3. Process Manufacturing Method: is characterized by the

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 15

4. Batch Method: Batch production is used when items are

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 16

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 17

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 18

1. Dispatching: it’s time to implement by dispatching items in

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 19

The master production schedule is an anticipated production

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 20

The MPS is a basis for communication between operations and

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 21

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 23

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 24

1. Ability to make adjustments to fluctuations in demand while

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 25

The purpose of the aggregate plan is to develop production rates

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 26

Marketing plan identifies the markets to be served, desired levels of

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 27

The aggregate plan (6 to 18 months) details the aggregate

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 28

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 29

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 30

The marketing plan identifies the sales needed to achieve the

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 31

Detailed in the marketing plan are the targeted market segments;

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 32

1. Level Aggregate Plan: Maintains a constant workforce and

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 33

Wavetop, Inc., a producer of water ski equipment, anticipates the

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 34

Summing the monthly demands, the company needs a total of

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 35

By calculating the amount of production needed each month, the

03/14/24 Imran Ali AMBA0208 O & SCM Unit Number:3 36

O&SCM Unit 3

O&SCM Unit 3