Operations & Supply Chain

Management(OSCM)
Unit : I
• Introduction to Operations and Supply Chain Management:
Definition, Concept, Significance and Functions of Operations
and SCM.
• Evolution from manufacturing to operations management,
Physical distribution to Logistics to SCM, Physical Goods and
Services Perspectives.
• Quality: Definitions from various Perspectives, Customers view
and Manufacturer's view, Concept of Internal Customer,
Overview of TQM and LEAN Management,
• Impact of Global Competition, Technological Change, Ethical
and Environmental Issues on Operations and Supply Chain
functions.
Operations Management
What is operations?
• The part of a business organization that is
responsible for producing goods or services
How can we define operations
management?
• The management of systems or processes that
create goods and/or provide services
Operations Management

The planning, scheduling, and control

of the activities that transform inputs
into finished goods and services.
 Decision Making
Most operations decisions involve many alternatives that can
have quite different impacts on costs or profits. Typical
operations decisions include:
⚫ What: What resources are needed, and in what amounts?
⚫ When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies be ordered?
⚫ Where: Where will the work be done?
⚫ How: How will he product or service be designed? How will the work be
done? How will resources be allocated?
⚫ Who: Who will do the work?
Scope of Operations Management
The scope of operations management ranges across the organization.

The operations function includes many interrelated activities

such as:
⚫ Forecasting
⚫ Capacity planning
⚫ Facilities and layout
⚫ Scheduling
⚫ Managing inventories
⚫ Assuring quality
⚫ Motivating employees
⚫ Deciding where to locate facilities
⚫ And more . . .
Operations Function
The collection of people, technology, and
systems within a company ...

… that has primary responsibility ...

… for providing the organization’s products

and/or services.
7’Ms of
Operations
anpower
aterial
achine
oney
easurement
ovement
ethods
The Transformation Process
Value-Added

Inputs
Land Labor Transformation/
Capital
Outputs
Information
Conversion Goods
Process Services

Measurement
and Feedback
Measurement Measurement
and Feedback and Feedback
Control

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established standards to determine if

corrective action is needed.
Production System

Conversion
Inputs Outputs
Subsystem
Control
Subsystem
Viewing Operations as
Transformation Process
Transformation
Process
Manufacturing operations

Inputs Outputs
 Materials  Tangible goods
 People  Fulfil ledrequests
 Equipment  Information
Service operations
 Intangible  Satisfied
needs Customers
 Information
Good or Service?
Goods are physical Services are activities
items that include raw that provide some
materials, parts, combination of time,
subassemblies, and location, form or
final products. psychological value.
• Automobile • Air travel
• Computer • Education
• Oven • Haircut
• Shampoo • Legal counsel
Manufacturing Vs. Services
Location, Exchange, Storage, Physiological, Information

Manufacturing Services
Tangible product Intangible “Product”
Key decisions driven by or Service
physical characteristics Key decisions:
of the product:
• How is the product
• How much customer
made? involvement?
• How do we store • How much
it? customization?
• How do we move
it?
Manufacturing vs. Service
Factors Manufacturing Services
Degree of customer contact LOW HIGH
Uniformity of input LOW
HIGH
Labor content of jobs LOW HIGH
Uniformity of output HIGH LOW
Measurement of productivity LOW HIGH
Production and delivery HIGH LOW
Quality assurance HIGH LOW
Amount of inventory HIGH LOW
Evaluation of work HIGH LOW
Ability to patent design HIGH LOW
Supply Chain Management

Active management of supply chain activities and

relationships to maximize customer value and achieve
a sustainable competitive advantage
Supply Chain
Supply Chain – a sequence of activities and
organizations involved in producing and delivering a
good or service

Suppliers’ Direct Final

Producer Distributor
suppliers Customers
suppliers
The Need for Supply
Chain Management
In the past, organizations did little to manage
the supply chain beyond their own operations
and immediate suppliers which led to numerous
problems:
• Oscillating inventory levels
• Inventory stock outs
• Late deliveries
• Quality problems
Physical Distribution
“The activities associated with the movement of
material, usually finished goods or service
parts, from the manufacturer to the customer”
• APICS 11th Edition
Dictionary
Physical Distribution
Physical Supply
• goods moving from supplier to manufacturer
• “inbound”
Physical Distribution
• goods moving from manufacturer to customers
• “outbound”
Physical Distribution
Material Flows
Upstream Downstream

Second First
Tier Tier Distributo Retaile
Supplier Supplier r r
Alcoa Final
customer
s

Transportation
companies
Channels of Distribution
Any series of firms or individuals
that participates in the flow of
goods and services from the raw
material supplier and producer to
the final user or consumer.”
Channels of Distribution
Company may deliver directly to customers
Use other companies or individuals to deliver
goods
Intermediaries
• wholesalers – agents
• transportation companies – warehouses
Channels of Distribution
Supply Chain Issues
Length of the chain
Complexity
Stability
Physical,
informational, and
monetary flows
 Basic SC structure
Upstream Downstream

Material Flow
Cash Flow

Supplier(s) Focal Firm Customer(s)

Information Flow
Supply Chain: Manufacturing
Example
Supply Chain: Service
Example
SCM for Milk
Cross-Functional Linkages
Finance MIS
Budgeting.
What IT solutions Human
to make it all work
Analysis.
together? Resources
Funds. Skills? Training?
# of Employees?
Design Operations &
Sustainability.
Quality.
Supply
Manufacturability Chain Marketing
What products?
.
What
Accounting Costs?
volumes?
Performance measurement systems. Quality?
Planning and control. Delivery?
Historical Milestones
in OM
The Industrial Revolution
Post-Civil War Period
Scientific Management
Human Relations and Behaviorism
Operations Research
The Service Revolution
The Industrial Revolution
1700’s Cottage
Industry....
Machine power for
human power....
Factory system which
resulted in greater
productivity.
The Industrial Revolution…Contd.

The industrial revolution developed in England in the 1700s.

The steam engine, invented by James Watt in 1764, largely replaced human
and water power for factories.

Adam Smith’s The Wealth of Nations in 1776 touted the economic benefits
of the specialization of labor.

Thus the late-1700s factories had not only machine power but also ways of
planning and controlling the tasks of workers.
The Industrial Revolution
The industrial revolution spread from England to
other European countries and to the United Sates.

In 1790 an American, Eli Whitney, developed the

concept of interchangeable parts.

The first great industry in the US was the textile

industry.
In the 1800s the development of the gasoline
engine
and electricity further advanced the revolution.

By the mid-1800s, the old cottage system of

production had been replaced by the factory system.
 Post-Civil War Period
During the post-Civil War period great
expansion of production capacity occurred.
By post-Civil War the following developments set
the stage for the great production explosion of
the 20th century:
• increased capital and production capacity
• the expanded urban workforce
• new Western US markets
• an effective national transportation system
Scientific Management
Frederick Taylor is known as the father of scientific
management. His shop system employed these
steps:
• Each worker’s skill, strength, and learning ability were
determined.
• Stopwatch studies were conducted to precisely set
standard output per worker on each task.
• Material specifications, work methods, and routing
sequences were used to organize the shop.
• Supervisors were carefully selected and trained.
• Incentive pay systems were initiated.
Scientific Management
In the 1920s, Ford Motor Company’s operation
embodied the key elements of scientific
management:
• standardized product designs
• mass production
• low manufacturing costs
• mechanized assembly lines
• specialization of labor
• interchangeable parts
Human Relations and
Behavioralism
In the 1927-1932 period, researchers in the
Hawthorne Studies realized that human factors
were affecting production.
Researchers and managers alike were
recognizing that psychological and sociological
factors affected production.
From the work of behavioralists came a gradual
change in the way managers thought about and
treated workers.
Operations Research
During World War II, enormous quantities of resources
(personnel, supplies, equipment, …) had to be deployed.
Military operations research (OR) teams were formed to
deal with the complexity of the deployment.
After the war, operations researchers found their way
back to universities, industry, government, and
consulting firms.
OR helps operations managers make decisions when
problems are complex and wrong decisions are costly.
The Service Revolution
The creation of services organizations accelerated sharply after
World War II.
Today, more than two-thirds of the US workforce is employed in
services.
About two-thirds of the US GDP is from services.
There is a huge trade surplus in services.
Investment per office worker now exceeds the investment per
factory worker.
Thus there is a growing need for service operations
management.
 The Computer Revolution
Explosive growth of computer and communication technologies
Easy access to information and the availability of more
information
Advances in software applications such as Enterprise Resource
Planning (ERP) software
Widespread use of email
More and more firms becoming involved in E-Business using
the Internet faster, better decisions over greater distances
Today's Factors Affecting OM

Global Competition
Quality, Customer Service, and Cost
Challenges
Rapid Expansion of Advanced
Technologies
Continued Growth of the Service Sector
Scarcity of Operations Resources
Social-Responsibility Issues
Comparison
Period Key Points to Remember

The Industrial Cottage Industry.to Factory System, Steam Engine,

1760-1820 Specialization of Labor, Interchangeable Parts
Revolution
increased capital & production capacity, urban
Post-Civil War
1865-1877 workforce, new Western US markets, national
Period
transportation system
Scientific standardized product designs, mass production, low
1880-1900
Management manufacturing costs, mechanized assembly lines
Human Relations psychological and sociological factors affected
1900-1920
and Behaviorism production
Operations
1945-1960 OR – LPP, Transportation, Assignment
Research
The Service Investment per office worker now exceeds the
1070-1980
Revolution investment per factory worker.
Today’s Global competition , Social Responsibility, AI & IOT
Quality
Quality is conformance to specifications.
Assuring manufacturing quality entails three
principal functions:
1. Quality design and engineering,
2. Quality control, and
3. Quality management.
 The Three Quality Gurus
1. Deming
2. Juran,
3. Philip Crosby:

Quality is defined as conformance to requirements, not

“goodness”. The system for achieving quality is prevention, not
appraisal.
.
The performance standard is zero defects, not “that’s close
enough”
The measurement of quality is the price of non-conformance.
The cost of
poor manufacturing quality is high. Rework, scrap, product failures and
recalls can severely damage a manufacturer through inefficiencies, delays,
QMS is a set of policies,
processes and
procedures required for
planning and execution
in the core business area
of an organization.

Q A is aimed to
avoid the defect,
QA provides
assurance
that quality
request
QC is aimed to ed will be
identify and fix achieved
the defects. It is
a procedure
that focuses on
fulfilling
the quality
requested
Dimensions of Quality:
Manufactured Products
Performance
• Basic operating characteristics of a product; how well a
car is handled or its gas mileage.
Features
• “Extra” items added to basic features, such as a stereo
CD
or a leather interior in a car
Reliability
• probability that a product will operate properly within an
expected time frame; that is, a TV will work without repair
for about seven years
Dimensions of Quality:
Manufactured Products (cont.)
 Conformance
 degree to which a product meets pre–established
standards
 Durability
 how long product lasts before replacement
 Serviceability
 ease of getting repairs, speed of repairs, courtesy and
competence of repair person
Dimensions of Quality:
Manufactured Products (cont.)
 Aesthetics
 how a product looks, feels, sounds, smells, or tastes
 Safety
 assurance that customer will not suffer injury or harm
from a product; an especially important consideration for
automobiles
 Perceptions
 subjective perceptions based on brand name, advertising,
and the like
Dimensions of
Quality: Service
 Time and Timeliness
 How long must a customer wait for service, and is it
completed on time?
 Is an overnight package delivered overnight?
 Completeness:

 Is everything customer asked for provided?

 Is a mail order from a catalogue company complete when
delivered?
Dimensions of Quality:
Service (cont.)
 Courtesy:
 How are customers treated by employees?
 Are catalogue phone operators nice and are their voices
pleasant?
 Consistency
 Is the same level of service provided to each customer
each time?
 Is your newspaper delivered on time every morning?
Meaning of Quality:
Producer’s Perspective
 Quality of Conformance
 Making sure a product or service is produced
according to design
 if new tires do not conform to specifications, they
wobble
 if a hotel room is not clean when a guest checks in, the
hotel is not functioning according to specifications of its
design
Meaning of Quality:
Customer’s Perspective
 Quality of Design
 Degree to which it matches to the expectation of
customer
 if a hotel room is not clean when a guest checks in, the
hotel is not functioning according to customers
expectation
Meaning of Quality
Meaning of Quality

Producer’s Consumer’s
Perspective Perspective

Quality of Conformance Quality of

Design
Production • Conformance to • Quality Marketing
specifications characteristics
• Cost • Price

Fitness for
Consumer
Use
Total Quality Management
What is TQM?
TQM is the integration of all functions and processes within
an organization in order to achieve continuous
improvement of the quality of goods and services. The goal is
customer satisfaction.

T Q M
TQM
Focus on the customer and their requirements
Right first time
Competitive benchmarking
Minimisation of cost of quality
• Prevention costs
• Appraisal costs
• Internal / external
failure costs
• Cost of exceeding
customer requirements
The TQM Approach
1.Find out what the customer wants
2.Design a product or service that meets or
exceeds customer wants
3.Design processes that facilitates doing the job
right the first time
4. Keep track of results

5. Extend these concepts to suppliers

 Continual
improvement

Competitive Team
benchmarking approach

Decisions Employee
based on facts empowerment

Elements of
TQM

Knowledge of
tools Suppliers

Supplier Quality at the

quality source

Champion
Lean
management
Lean management is an approach to managing
an organization that supports the concept of
continuous improvement, a long-term
approach to work that systematically seeks to
achieve small, incremental changes in
processes in order to improve efficiency and
quality.
Lean Manufacturing goals
Impact of
global
competition
Primary Factors
Availability of raw materials
Nearness to the market
Availability of labor
Transport facilities
Availability of fuel and power
Availability of water
Secondary factors
Suitability of climate
Government policies
Availability of finance
Competition between states
Availability of facilities
Disposal of waste
Technological Changes
Ethical and Environmental Issues on
Operations and Supply Chain functions
The product life cycle is the basis of
green supply chain management.
Supply Chain in the Environmental Life Cycle

Designing the supply chain concurrently

with the product is a supply chain
management best practice.

Concept Design Raw Retail/

Material Transport Manufacture Transport Consumer Transport Disposal
Extraction Use

Typical Supply Chain Scope

The environmental impacts of each LC
stage are examined for reduction.
Water Water
Inputs Energy Energy

Stage
Design Raw Retail/
Concept
Material Transport Manufacture Transport Consumer Transport Disposal
Extraction Use

Air Air Air Air

Impacts Water Air Water Air Water Air Water

Wast Wast Wast Wast

e e e e
Historically, GSC management focused
on the upstream supply chain.
Typical Green Supply Chain Analysis

Manufacturer encourages
suppliers to adopt green
Supplier practices, environmental
management systems,
etc.
Supplier Manufacturer Focus is on the material
content and
environmental practices
Supplier of suppliers.
Companies are starting to view
GSC as a strategic analysis tool.
Pollution Prevention Hierarchy

Long Strategic
Source
Term Reduction

Recycle/Reuse

Control
Technology
The Pollution
Disposal Prevention Hierarchy
gauges the value of
Short Tactica
environmental
programs.
Term l
 Waste Reduction Opportunities in the Life Cycle

Concept Design Raw Retail/

Material Transport Manufacture Transport Consumer Transport Disposal
Extraction Use

Control
Reduce Reuse/Recycle Dispose
Technology
What benefits Working with
environmental supply chain
management ?
- Improved business & public image
- Reduced risk of legal non-compliance
- Attraction of environmentally aware customers
- Improved productivity and efficiencies
- Improved quality
- Reduced number of defaults
- Improved environmental management
- More sustainable products
End of Unit 1
Unit 2

Operations Processes
Operations Processes: Process Characteristics in Operations: Volume
Variety and Flow.
Types of Processes and Operations Systems - Continuous Flow
system and intermittent flow systems.
Process Product Matrix: Job Production, Batch Production,
Assembly line and Continuous Flow, Process and Product Layout.
Service System Design Matrix : Design of Service Systems, Service
Blueprinting.
 Transformation
process
INPUTS
People  Method(s) of conversion. OUTPUTS
Energy Support function to
materials provide controls and Goods
information feedback and to service
fixed assets improve s
the process
 Learning Objectives
Explain the strategic importance of process
selection.
Explain the influence that process selection has
on an organization.
Describe the basic processing types.
Discuss automated approaches to processing.
Explain the need for management of Technology.
 Learning Objectives
List some reasons for redesign of layouts. Describe the basic
layout types.
List the main advantages and disadvantages of product
layouts and
process layouts.
Solve simple line-balancing problems. Develop simple
process layouts.
Factors Affecting The Choice Of Manufacturing
Process
Following factors need to be considered before making
a choice of manufacturing process:

1. Effect of volume/variety
2. Capacity of the plant
3. Lead time
4. Flexibility and efficiency
 Four V’s
All operations processes have
one
thing in common, they all take their
"inputs" like,raw materials, olume
knowledge, capital, equipment and
ariety,
time and transform them into outputs
(goods and services). \They do this is
ariation
different ways and the main four are isibility.
known as the Four V‟s,,
 The Volume
Dimension
A great example of this is McDonalds, they are
a well known example of high volume low cost
hamburger and fast food production.
repeatability of the tasks, systemization of the
work, where standards and procedures drive
the way in which each part of the job is carried
out.
 The Variety
Dimension
A common example used to describe the
variety dimension is the contrast between a taxi
and a bus service.
Both offer hired transportation services but a
taxi service has a much higher variety
dimension as they will basically pick you up and
drop you off wherever it is you need to go. …
 The Variation
Dimension
 Consider two home building companies.
One offers prefabricated homes that
you choose from a catalogue or online.
It is transferred to site and erected
over the course of a few days.
 The second building company offers
customized homes they have display
homes they have built that you can
walk through. …
 The Visibility
Dimension
This dimension refers to a customers ability to
see, track their experience or order through the
operations process. A high visibility dimension
includes courier companies where you can
track your package online or a retail store
where you pick up the goods and purchase
them over the counter. …
Facility
layout
Process & Product Layout
 Facility
layout
Facility layout refers to the arrangement of
• machines,
• departments,
• workstations,
• storage areas,
• aisles, and
• common areas within an existing or proposed
facility.
Implications
• Layouts have far-reaching implications for
• the quality,
• productivity, and
• competitiveness of a firm.
• Layout decisions significantly affect how efficiently workers can
do their jobs,
• how fast goods can be produced,
• how difficult it is to automate a system, and
• how responsive the system can be to changes in
• product or service design,
• product mix, and
• demand volume
Objective of the layout decision
Ensure a smooth flow of work, material, people, and information through the system
Effective layouts also:
• Minimize material handling costs;
• Utilize space efficiently;
• Utilize labor efficiently;
• Eliminate bottlenecks;
• Facilitate communication and interaction between workers, between workers and their supervisors,
or between workers and customers;
• Reduce manufacturing cycle time and customer service time;
• Eliminate wasted or redundant movement;
• Facilitate the entry, exit, and placement of material, products, and people;
• Incorporate safety and security measures;
• Promote product and service quality;
• Encourage proper maintenance activities;
• Provide a visual control of operations or activities;
• Provide flexibility to adapt to changing conditions.
Basic Layouts

Process,
Product, and
Fixed-position
Three hybrid
layouts:
• cellular
layouts,
• flexible
manufactur
Process Layout
Process Layout
(functional)

Dept. Dept. Dept.

A C E

Dept. Dept. Dept.

B D F

Used for Intermittent

processing
Job Shop or Batch
Processes
 Process
layouts
It is also known as functional layouts, group similar activities together in
departments or work centers according to the process or function they
perform.
• For example, in a machine shop, all drills would be located in one work
center, lathes in another work center, and milling machines in still another
work center.
• In a department store, women's clothes, men's clothes, children's clothes,
cosmetics, and shoes are located in separate departments.
A process layout is characteristic of intermittent operations, service
shops, job shops, or batch production, which serve different customers
with different needs.
The volume of each customer's order is low, and the sequence of
operations required to complete a customer's order can vary
considerably.
Process Layout

Milling

Assembly
Grinding
& Test

Drilling Plating
Process Layout - work
travels to dedicated
process centers
Advantages of Process Layouts

Can handle a variety of processing

requirements
Not particularly vulnerable to equipment
failures
Equipment used is less costly
Possible to use individual incentive
plans
Disadvantages of Process Layouts

In-process inventory costs can be high

Challenging routing and scheduling
Equipment utilization rates are low
Material handling slow and inefficient
Complexities often reduce span of supervision
Special attention for each product or customer
Accounting and purchasing are more involved
 Product Layout

Raw materials
Station Finished
or Station Station Station 2 3 item
1
customer 4

Material Material Material Material

and/or and/or and/or and/or

labor labor labor labor

Used for Repetitive or Continuous

Processing
Product
layouts
• It is, better known as assembly lines, arrange activities in a line according to the sequence
of operations that need to be performed to assemble a particular product.
• Each product has its own "line" specifically designed to meet its requirements.
• The flow of work is orderly and efficient, moving from one workstation to another down the
assembly line until a finished product comes off the end of the line. Since the line is set up
for one type of product or service, special machines can be purchased to match a product's
specific processing requirements.
• Product layouts are suitable for mass production or repetitive operations in which demand
is stable and volume is high.
• The product or service is a standard one made for a general market, not for a particular
customer.
• Because of the high level of demand, product layouts are more automated than process
layouts, and the role of the worker is different. Workers perform narrowly defined assembly
tasks that do not demand as high a wage rate as those of the more versatile workers in a
process layout.
A U-Shaped Production
Line
In 1 2 3 4
5

Worker
s
6
Ou 10 9 8 7
t
 Heat Gear
-1111 Lathe Mill Drill -1111
treat cut

Heat
222222222 Mill Drill Grind - 2222

Assembly
treat

Heat
3333333333 Lathe Mill Grind - 3333
treat

Mill Drill Gea - 4444

44444444444444
r
cut
Advantages of Product Layout
High rate of output
Low unit cost
Labor
specialization
Low material
handling cost
High utilization of
labor and
equipment
Established routing and scheduling
 Disadvantages of Product
Layout
Creates dull, repetitive jobs
Poorly skilled workers may not maintain
equipment or quality of output
Fairly inflexible to changes in volume
Highly susceptible to shutdowns
Needs preventive maintenance
Individual incentive plans are
impractical
Fixed-position
layouts
It is typical of projects in which the product produced is too fragile, bulky, or heavy to move.
Ships, houses, and aircraft are examples.
In this layout, the product remains stationary for the entire manufacturing cycle. Equipment,
workers, materials, and other resources are brought to the production site.
Equipment utilization is low because it is often less costly to leave equipment idle at a
location where it will be needed again in a few days, than to move it back and forth.
Frequently, the equipment is leased or subcontracted, because it is used for limited periods of
time.
The workers called to the work site are highly skilled at performing the special tasks they are
requested to do.
For instance, pipefitters may be needed at one stage of production, and electricians or
plumbers at another. The wage rate for these workers is much higher than minimum wage.
Thus, if we were to look at the cost breakdown for fixed-position layouts, the fixed cost would
be relatively low (equipment may not be owned by the company), whereas the variable costs
would be high (due to high labor rates and the cost of leasing and moving equipment).
Hybrid - Cellular
Layout
What is Process
Selection?
Process selection
• Deciding on the way production of goods or
services will be organized
Major implications
• Capacity planning
• Layout of facilities
• Equipment
• Design of work systems
Process Selection and
System Design
Process Strategy

• Key aspects of process strategy

– Capital intensive – equipment/labor
– Process flexibility
– Technology
– Adjust to changes
– Design
– Volume
– technology
Technology

Technology: The application of scientific

discoveries to the development and
improvement of products and services and
operations processes.
Technology innovation: The discovery
and development of new or improved
products, services, or processes for
producing or providing them.
 Kinds of Technology
Operations management is primarily concerned with three kinds of
technology:
• Product and service technology
• Process technology
• Information technology
All three have a major impact on:
• Costs
• Productivity
• Competitiveness
Technology Competitive
Advantage
Innovations in
• Products and services
• Cell phones
• PDAs
• Wireless computing
• Processing technology
• Increasing productivity
• Increasing quality
• Lowering costs
Technology Acquisition
Technology can have benefits but …
Technology risks include:
• What technology will and will not do
• Technical issues
• Economic issues
• Initial costs, space, cash flow,
maintenance
• Consultants and/or skilled employees
• Integration cost, time resources
• Training, safety, job loss
 Process
Selection
Batc
Variety h
• How much
Job Repetitiv
Flexibility
Shop e
• What degree
Volume Continuous
• Expected output
Process
Types
Job shop
• Small scale
Batch
• Moderate volume
Repetitive/assembly line
• High volumes of standardized
goods or services
Continuous
• Very high volumes of non-
discrete goods
 PQ Relationships
P
Fixed Position
Layout

Process Layout

Job Shop
Product
Variety

Product Layout
Batch Production

Assembly Line &

Continuous
Flow Q

100 10000 1000000

Production
 Product and
Service Processes
Process Type
Appliance repair
Job Shop Emergency room
Commercial
baking
Batch
Classroom
Lecture
Automotive
assembly
Repetitive
Automatic
carwash

Continuous Steel Production

Water purification
(flow)
 Product and
Service Processes
Process Volume
Process Type Job variety Unit cost
flexibility of
output

Job Shop Very High Very High Very High Very low

Moderate to
Batch Moderate Moderate Moderate
High

Repetitive Low Low Low Moderate to High

Continuous
Very low Very low Very low Very High
(flow)
The Need for Layout Decisions

Inefficient operations
For Example: Changes in the
High Cost design of products
Bottlenecks or services

Accidents
The introduction of
new products or Safety
services hazards
The Need for Layout Design
(Cont’d)
Changes in
Changes in volume of
environment
al or other output or mix of
legal products
requirements
Morale problems
Changes in
methods and
equipment
 Service Layouts

Warehouse and storage layouts

Retail layouts
Office layouts
Service layouts must be aesthetically
pleasing as well as functional
 How are Services
Different?
Everyone is an expert on services
What works well for one service provider doesn‟t necessarily
carry over to another
Quality of work is not quality of service
“Service package” consists of tangible and intangible
components
Services are experienced, goods are consumed
Mgmt of service involves mktg, personnel
Service encounters mail, phone, F2F
 Degree of Customer
Contact
More customer contact, harder to standardize
and control
Customer influences:
• Time of demand
• Exact nature of service
• Quality (or perceived quality) of service
What do People
Want?
Amount of friendliness and helpfulness
Speed and convenience of delivery
Price of the service
Variety of services
Quality of tangible goods involved
Unique skills required to provide service
Level of customization
 Service-System Design
Matrix Degree of customer/server contact
Buffered Permeable
Reactive
(none) (some) (much)
High Low
Face-to-face
total
Opportunity

customization
Face-to-face
Sales

loose specs Production

Face-to-face
tight specs
Phone Efficiency
Internet & Contact
on-site
Mail contact technology

Low High
Customer Journey

Line of Interaction

Front stage
Human-To-Human

Human-To-
Computer

Line of
Visibility

Back stage

Line of Internal
Interaction
UNIT 3
 PRODUCTION
PLANNING &CONTROL
(PPC)
LEARNING OBJECTIVE
earning
Session should help us to understand following

1. Production Planning and control

2. Objectives of PPC
Part I 3. The factors determining production planning procedures.
4. The scope of PPC

5. Phases in PPC functions

6. Benefit of PPC function
Part II 7. Limitations of PPC function
8. PPC in Different Production systems
Session Outline
Introduction Production Planning and control
• Definition
• 3 phases of PPC
• Production (Transformation)

Factors determining production planning

procedures. Role & scope
Benefit & Limitations of PPC
function PPC in Different Production
systems
Introduction to PPC
 Production Planning and Control
Designing Determining Determining Capacity
Designing layout
Product Eqpmnts. rqmnt.

Planning, direction and co-ordination

of the firm’s facilities to achieve the
Predetermined Production objectives
in the most economical manner.
Determining Material Sequence of Nature Specifying quality
Time Management
Handling Eqpmnt. of & quantity level
opns.
opns.
 Utilization of resources available fromthe best
Planning possible alternatives

Performance in accordance with the details set out

Operation
in the production plan

Monitoring of Performance and comparing with

Control planned
1. Deliver Quality goods in required Quantity to the customer in
the required Delivery Schedule to achieve maximum Customer
Satisfaction and Minimum Possible Cost

2. Ensure maximum Utilization of Recourses

3. Minimize product Through Put time (Mfg. cycle time)

4. Maintain Optimum Inventory levels

5. Coordination between labour and machines and
various supporting departments
 Objectives of PPC
…contd.
6. Remove bottle neck at all stages of production and to solve
problems related to production
7. Ensure effective cost reduction and cost control

8. Plan for plant capacity for future requirements

Production Planning is to provide a physical system with a set of

operating guidelines for efficient conversion of raw materials,
human skills and other inputs into finished products
1. Volume of Production-

2. Nature of Production Processes-

3. Nature of Operations
1. Volume of Production-
Intensity of Production planning varies and
depend upon volume of production
i. Custom order Job shop- Air Buses,
ii. High volume operations- fasteners
2. Nature of Production Processes-
i.Continues ii.Intermittent
( batch wise) iii.Job
Production
 3. Nature of Operations
i. Manufacturing to order (may or may not be repeated)
ii. Stock and sell ( Batch or mass production- automobile,
watches, TV etc.)
iii. Stock and sell ( Continues production- sugar, chemicals,
yarn etc. )
 Materials Raw Material, Spare parts , Components

Methods Best sequence of operations with in the limitations of existing layout

Machines & selection of m/c, tools, maintenance policy , replacement policy etc.
Equipments
Flow of work, layout, temporary storage of raw materials,
Routing material handling systems

Estimating Process time (set up & Opn time), standard time (Labour & m.c time)
Scope of Production
Planning
Loading & Capacity & Capability of m/c.
Starting & Completion time of each and every
Scheduling operations
execution of planning functions. Orders, instruction, release of
Dispatching material and tools to instruction, release of material and tools
to operators

Feed back, follow up

Progressing ,
Evaluating or
Controlling
Evaluation for improvement
 Product planning and development including product
What to produce ?
design.

How to produce ? Process planning, material planning, tool planning etc.

Facilities planning, capacity planning and sub-

Where to produce ?
contracting planning.

When to produce ? Production scheduling and machine loading

Who will produce ? Man power planning

How much
to produce
Planning for quantity, Economic batch size etc.
?
Product design
Job design & process design
Equipment selection and replacement
Labour skills and training programs
Raw material selection and sub contracting
Plant selection and layout
Scheduling steps of the plan
Implementing and controlling the schedule
Operating the production system
Benefit of PPC function
Efficient PPC results in
• high quality production
• Better utilization of resources
• Reduced inventories
• Reduced through put time
• Better customer service
Lower production cost and lower capital investment
PPC function is based on certain assumptions or forecasts of
customer’s demand, plant capacity , availability of materials ,
power etc. If these assumptions go wrong , PPC becomes
ineffective.
Employee may resist changes is production levels set per
production plans if such plans are rigid.
The production planning process is time consuming when it is
necessary to carry out routing and scheduling functions for and
complex production consisting of a large no of parts going into the
product.
 Limitations of PPC function…
contd.
PPC function becomes extremely difficult when the
environmental factors changes very rapidly such as
• Technology, PC function becomes extremely difficult when the
• Customer’s taste regarding fashion or style of product
needed,
• Government policy and control change frequently,
• Stoppage of power supply by electricity board due to
power cuts ,
• Break in supply chain due to natural calamities such
as floods
earthquakes wars etc.
PPC in Different Production
systems
 PPC in Job
• Qty. is usually small
• Examples: large turbo generators, boilers, steam engines,
processing equipments , material handling equipments, ship
building etc.
• Types
• Small no. of products produced only once
• Small no. of products intermittently when the need arises
• Small no. of products produced periodically at known interval of
time
 PPC in Job
Production…contd.
PPC function is relatively difficult
• Every job order is of different nature and has different
sequence of operations. There is no standardization routing
for job orders.
• Specific job orders are assigned to different workstations as
per availability of capacity.
• Production schedules drawn depend on the relative priority
assigned to several job orders.
• Scheduling is dependent on assessment of production times
and estimating is based on judgment
 PPC in Batch Production
• Mfg. no. of identical articles either to meet a specific order
or satisfy continuous demand
• Decision regarding tooling and jigs and fixtures are
dependant on the quantities involved in production batch
• Type
• Batch produced only once
• At repeatedly at irregular interval, when the arises
• Periodically at known intervals, to satisfy continuous demand
PPC in Batch Production…
contd.
Here PPC is more simplified as quantities increase and
as manufacture becomes more regular.
Two problems that may arise in batch production are
due to size of batch and due to scheduling of
production
Solutions:
• External customer orders only
• Whether the plant is producing for internal consumption i.e.
subassembly used in the final product
PPC in Continuous
Production
It is normally associated with large no. of quantities
of production and with high rate of demand.
Types
• Mass Production –
• Flow Production-
 Production Planning is the key activity for the
organization's
efficiency,
effectiveness,
timely delivery,
quality product
and
customer
satisfaction.

This is just like the steering wheel of running vehicle, which

drives you destination.
Demand
Forecasting
An estimate of future demand.
A forecast can be determined by mathematical
means using historical, it can be created
subjectively by using estimates from informal
sources, or it can represent a combination of both
techniques.
 Why Forecast ?
• To plan for the future by reducing uncertainty.
• To anticipate and manage change.
• To increase communication and integration of planning teams.
• To anticipate inventory and capacity demands and manage lead
times.
• To project costs of operations into budgeting processes.
• To improve competitiveness and productivity through decreased
costs and improved delivery and responsiveness to customer
needs.
Decisions that Need
Forecasts
Which markets to pursue?
What products to produce?
How many people to hire?
How many units to purchase?
How many units to produce?
And so on……
Common Characteristics of
Forecasting
Forecasts are rarely perfect

Forecasts are more accurate for aggregated data

than for individual items

Forecast are more accurate for shorter than longer

time periods
 Constructing
Demand Forecasting
1.
1.
System.
Determine the information that needs to be forecasted.
This includes defining the source of the historical data to be provided and
the periods over which the data will be collected.
2. Assign responsibility for the forecast to a person which
performance will be measured on the accuracy of actual sales to
the forecast.
3. Setup forecast system parameters :
1. Forecast horizon.
2. Forecast level : Business unit, Product family, Model and brand, or
SKU.
3. Forecast period and frequency.
4. Forecast revision : The way in which changes to the forecast will be
recorded, such as original forecast, revised forecast, subsequently
revised forecast, current forecast.
 Demand Forecasting System
4. Select appropriate forecasting models and techniques.
5. Collect data for input to forecasting models and test models for
forecast accuracy.
6. Run the forecasting model and generating forecasts.
7. Record actual demand information against forecast.
8. Report forecast accuracy and determine the root cause for
variance between forecast and actual data. Periodically assess
the forecast system for performance, so that changes can be
made to the forecasting approach where necessary.
Types of Forecasting Models
• Forecasts generated subjectively by the forecaster

• Forecasts generated through mathematical modeling

General Methods of
Forecasting
1. Qualitative Techniques.
• They are based on expert or informed
opinion regarding future product
demands.
• This information is intuitive and based on
subjective judgment.
• Qualitative techniques include gathering
information from customer focus groups,
groups of experts, think tanks, research
groups, etc.
Qualitative Methods
Market R
Market research is used mostly for product research in the sense of
looking for new product ideas, like and dislikes about existing products,
which competitive products within a particular class are preferred, and
so on.
Panel
In a panel consensus, the idea that two heads are better than one is
extrapolated to the idea that a panel of people from a variety of
positions can develop a more reliable forecast that a narrow group.
Panel forecasts are developed through open meetings with free
exchange of idea from all levels of management and individuals.
Historical
In trying to forecast demand for a new product, an ideal situation
would be where an existing product or generic product could be used
as a model. There are many ways to classify such analogies - for
example, complementary products, substitute or competitive products,
and products as a function of income.
Delphi .
The Delphi method conceals the identity of the individuals participating
in the forecasting. Everyone has the same weight. Procedurally, a
moderate creates a questionnaire and distributes it to participants.
Their response are summed and given back to the entire group along
with a new set of questions.
Statistical Forecasting
▶Time Series Models:
▶ Assumes the future will follow same patterns as the past

▶Causal Models:
▶ Explores cause-and-effect relationships
▶ Uses leading indicators to predict the future
▶ E.g. housing starts and appliance sales
Time Series Analysis.
Time series analysis is
based on the idea that
data relating to past
demand can be used to
predict future demand.
Past data may include
several components,
such as trend,
seasonal, or cyclical
influences
140

120

100

80

60

40

20

0
1 2 3 4 5 6 7 8 9 10
Composition of Time Series
Data
Data = historic pattern + random variation
Historic pattern may include:
• Level (long-term average)
• Trend
• Seasonality
• Cycle
Time Series
Patterns
Methods of Forecasting the
Level

Naïve Forecasting
Simple Mean
Moving Average
Weighted Moving Average
Exponential Smoothing
Naïve
Forecasting
Next period
forecast = Last
Period’s actual:

 At
Ft  1
 Naïve
Month Period Orders (A) Forecast
January 1 122
February 2 91 122
91
March 3 100
April 4 77 100

May 5 115 77

June 6 58 115

July 7 75 58
75
August 8 128
128
September 9 111
October 10 88 111
88
November 11
Simple Average
(Mean)
Next period’s
forecast =
average of all
historical
data At  .........
Ft    At  1  At  2
1 n . ..
 Simple Avg
Month Period Orders (A) Forecast
January 1 122
February 2 91 122
107
March 3 100
April 4 77 104

May 5 115 98

June 6 58 101

July 7 75 94
91
August 8 128
96
September 9 111
October 10 88 97
97
November 11
An arithmetic average of a certain number n of the
most recent observations. As each new observation is
added, the oldest observation is dropped. The value of
n (the number of periods to use for the average)
reflects responsiveness versus stability in the same
way that the choice of smoothing constant does in
exponential smoothing.
 Moving Average
Next period’s forecast = simple average of the
last N periods

At  .........  A t  N  1
Ft   A t1
N
1
 Moving Avg. (N=3)
Month Period Orders (A) Forecast
January 1 122
February 2 91
March 3 100
April 4 77 104

May 5 115 89

June 6 58 97

July 7 75 83

August 8 128 83
87
September 9 111
October 10 88 105
109
November 11
 Moving Avg. (N=5)
Month Period Orders (A) Forecast
January 1 122
February 2 91
March 3 100
April 4 77
May 5 115
June 6 58 101

July 7 75 88

August 8 128 85
91
September 9 111
October 10 88 97
92
November 11
 Weighted Moving
WhereasAverage
the simple moving average gives equal
weight to each component of moving average
database, a weighted moving average allows any
weights to be placed on each element, providing, of
course, that the sum of all weights equals 1.
F t= w1A t - 1+ w2 A t - 2 +.....+ wn A t - n
where wi = Weight to be given to the actual occurrence for the period
(t – n)
n = Total number of periods in the forecast.
∑ n i= 1 = 1, The sum of all the weight must equal 1.
 Weighted Moving
Avg. (N=3), .2,.3,.5
Month Period Orders (A) Forecast
January 1 122
February 2 91
March 3 100
102
April 4 77
May 5 115 87

June 6 58 101

July 7 75 79

August 8 128 78
98
September 9 111
October 10 88 109
103
November 11
 Exponential Smoothing
A type of weighted moving average forecasting techniques in which
past observations are geometrically discounted according to their
age. The heaviest weight is assigned to the most recent data.
The techniques makes use of a smoothing constant to apply the
difference between the most recent forecast and the critical sales
data.

F t= α A t-1+ ( 1 - α ) F t-1
where Ft = New forecast.
A t- 1 = Latest demand.
F t- 1 = Previous forecast.
α = Smoothing factor. (0
≤ α ≤ 1)
 Exponential
Smoothing
Month Period Orders (A) (α= 0.2) Forecast
January 1 122 122

February 2 91 122

March 3 100 116

April 4 77 113

May 5 115 106

June 6 58 108
98
July 7 75
August 8 128 93

September 9 111 100

October 10 88 102

November 11 99
Time Series Problem
Solution
Simple Simple Weighted
Exponent Exponenti
ial al
Naïve Simple Moving Moving Moving Smoothin Smoothin
g g
Peri Orders( Forecast Average Average Average(N= Average (=0.2) (=0.5)
o A) (N=3) 5) (N=3)
d
1 122 122 122
2 91 122 122 122 122
3 100 91 107 116 107
4 77 100 104 104 102 113 104
5 115 77 98 89 87 106 91
6 58 115 101 97 101 101 108 103
7 75 58 94 83 88 79 98 81
8 128 75 91 83 85 78 93 78
9 111 128 96 87 91 98 100 103
10 88 111 97 105 97 109 102 107

11 88 97 109 92 103 99 98
Causal Forecasting
Causal forecasting assumes that demand is related
to some underlying factor for factors in the
environment.
Causal forecasting methods develop forecasts after
establishing and measuring an association between
the dependent variable and one or more
independent variables.
Casual Models

Often, leading indicators hint can help predict

changes in demand
Causal models build on these cause-and-
effect
relationships
A common tool of causal modeling is linear
regression:

Y  ab
x
 Regressio
n
A method of fitting an equation to a data set. Simple
regression involves one independent variable and one
dependent variable. Least squares is the most common
method of regression.
Linear Regression
▶Identifydependent (y) and
independent (x) variables
 X  Y 
▶Solve for the slope of the
XY 
b 

 X 2  X  X

 line
 nXY
b 
 XY 2
 nX
 X2
▶Solve for the y intercept
a  Y  bX
▶Develop your equation for the
trend line
Y=a + bX
Linear Regression Problem: A maker of golf shirts has been tracking the
relationship between sales and advertising dollars. Use linear
regression to find out what sales might be if the company invested
$53,000 in advertising

Adv.$ Sales $ XY X2 Y2
(X) (Y)
1 48 130 4240 2304 16,900
2 52 151 7852 2704 22,801
3 50 150 7500 2500 22,500
4 55 158 8690 3025 24964
53 153.85
Tot 205 589 30282 10533 87165
Avg 51.25 147.25

b 
3028 2  4  5 1 . 2 5  1 4 7 . 2 5   3 . 5
1 0 5 3 3  4 5 1 . 2 5 2
8
a  Y  b X  1 4 7 . 2 5  3 . 5 8 51 .

b   X Y2  nXY
2 25 
a  -36.20

 X  nX Y  a  bX  -36.20  3.58x
Y 5  - 3 6 . 2 0  3 . 5 8 5 3   1 5 3 . 5
4
Capacity
Planning
Do you think in the operations management should
measure the human capacity and the machine capacity
with the same measurement?
Measuring
Capacity
Examples
Measuring Capacity
Examples
Input Measures Output Measur
Typ e of Business
of Capacity es of Capacit
y
Car manufacturer Labor hours Ca rs per shift

Available bed s Patients per month

Hospital
Labor hours Pizzas perday
Pizza parlor
Floor spacei
Retail store Revenue per foot
n square feet
Measuring Available Capacity
• Maximum output rate under ideal conditions
• A bakery can make 30 custom cakes per day when pushed at
holiday time
Effective
capacity:
• Maximum
output rate
under
normal
(realistic)
conditions
• On the
average this
bakery can
Measuring Effectiveness of
Capacity Use
Measures how much of the available capacity is actually
being used:

Utilization  actual output rate 100%

capacity

• Measures effectiveness
• Use either effective or design capacity in
denominator

84
Example of Computing Capacity Utilization: A bakery’s design capacity is 30
custom cakes per day. Currently the bakery is producing 28 cakes per day. What
is the bakery’s capacity utilization relative to both design and effective
capacity?

actual output
Utilization (100%)  28 (100%)  140%
effective  20
effective capacity

actual output
Utilization (100%)  28 (100%) 93%
design  30
design capacity

The current utilization is only slightly below its design capacity and considerably
above
its effective capacity
The bakery can only operate at this level for a short period oftime
 Why term efficiency and utilization are
important to measure the capacity of any
business related issue? Choose any business
issue of your choice and based on that justify
your argument?
Capacity Planning
Capacity Planning or Aggregate Planning is defined as the process of
aggregating (i.e., consolidating or grouping) all the requirements for
fulfilling capacity requirements for each period and determining the
best way to provide the needed capacity.

The objectives of capacity planning are feasibility i.e., the internal

needs must be within the capability of the operations system and
optimality i.e., it is desirable to determine the least costly way to meet
the capacity needs.
Basic questions in capacity
planning
• What kind of capacity is
needed?
• How much is needed?
• When is it needed?
Is there any relationship between consumer demand and
production capacity of any manufacturing firm? Discuss from
the point of any manufactured products of your choice.
Capacity planning
normally involves the
following activities:
 Selecting a capacity
alternative most
suited to achieve
strategic Assessing
mission existing
capacity
Evaluating
financial,
economical,
and
technological
capacity
alternatives

Forecasting
capacity
needs
Identifying
alternative ways
to modify capacity
From the point of current market trends of Indian Car Manufacturing sector do
you thing the manufacturer should think about the modification of their capacity
of production? Why or why not? Discuss.
Do you think Country like SriLanka should manufacture automobile in the
country? Why or why not? Discuss your opinion incorporating the concept of
public demand and capacity of production in SriLanka.
 Discussion
Questions

1.Define and describe the operating capacity of a college of business

administration. How should its capacity be measured?
2.Discuss the fundamental differences between long term and short term capacity
decisions.
3. Capacity will be modified in response to demand. Demand will be modified in
response to capacity. Which statement is correct? Why?
4. What is capacity planning?
Aggregate Production
planning
Planning Horizon

Long range

Intermediate range
Short
range

Now 2 months 1 Year

 Long-range plans (over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion

Top executives
Intermediate-range plans
(2 to 12 months)
Sales planning
Production planning and
budgeting
Setting employment, inventory, subcontracting levels
Operations Analyzing operating plans
managers • Short-range plans (up to 3 months)
• Job assignments
• Ordering
• Job scheduling
Operations • Dispatching
managers, • Overtime
supervisors, foremen • Part-time help

Responsibility Planning tasks and horizon

Aggregate
Planning
Aggregate
It is a prod
It is not
aggregate
For exam
does not
representati
All
Aggregate Planning

Demand forecasting for aggregate

unit
Resources
• Workforce/production rate
• Facilities and equipment

Policies
• Subcontracting
• Overtime
• Inventory levels
• Back orders
rket Place & Demand

Product Decision

Process Planning
and
Capacity Decisions

Inventory on Hand
Aggregate Plan
for
Production

Master Production
Schedule al Capacity Subcontrac
and MRP Systems

Detailed Work Schedules

 Level Production

by Prentice-Hall
Inc
 Example 1

Demand Per
Month Expected Demand Production Days Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Example 1

Jan Feb Mar Apr May

June
 
18 21 1 22 20
2 2
2
Example 2

lowest monthly
forecast

Jan Feb Mar Apr May

June
 
18 21 1 22 20
2 2
2
Chase
Demand
Chase
Demand
 Mixed Strategies
There are both inventory changes and work force and production rate changes
over the planning horizon.
Typically, mixed strategies are better (result in lower costs) than pure
strategies
Master
Production
Schedule
Master Production Schedule

It indicates the and of planned production by

taking into account desired delivery quantity and
timing as well as on-hand inventory.

The MPS is one of the primary outputs of the master

scheduling process.
Aggregate Plan to Master
Schedule
Aggregate Jan Feb Mar.
Planning 200 300 400

Disaggregation
Type Jan. Feb. Mar
21 inch 100 100 100
26 inch 75 150 200
Master
Schedule 29 inch 25 50 100
Total 200 300 400
 Example: Master

Industrial pumps wants to prepare a Master

Production Schedule (MPS) for June and July.
 Marketing has forecasted demand of 120 pumps for
June and 160 pumps for July.
 These have been evenly distributed over the four
weeks in each month: 30 per week in June and 40 per
week in July.
 Example: Master
Schedule
Now suppose that there are currently 64 pumps in
inventory (i.e., beginning inventory),
There are customer orders that have been committed
for the first five weeks (booked) and must be filled
which are 33, 20, 10, 4, and 2 respectively.
Suppose a production lot size of 70 pumps is used.
Prepare the Master Production Schedule
 Beginning

Inventory

JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29

Forecast is larger than

Customer orders in week 3

Forecast is larger than

Customer orders are larger
Customer orders in week 2
than forecast in week 1
 Solution: The master schedule
Requirements Net MPS Projected
previous week inventory inventory
before
MPS
1 64 33 31 31
2 31 30 01 01
3 01 30 -29 70 41
4 41 30 11 11
5 11 40 -29 70 41
6 41 40 01 01
7 01 40 -39 70 31
8 31 40 -09 70 61
MRP
Material Requirements
Planning
• Materials requirements planning (MRP)

Time scheduling information

 250
Aggregate
50 Product Plan Forecasts
Firm orders
of demand
from known
from
customers estimates

Master
Production
Engineering Schedule Inventory
(MPS)
Design Transactions
Changes

Material
Bill of Inventory
Material file Record file
Planning
(MRP)

Reports
Given the product structure tree for “A” and the lead time and demand information below, provide a
materials requirements plan that defines the number of units of each component and when they will be
needed.

Lead Times
A A. 1 day
B. 2 days
C. 1 day
D. 3 days
B(4) C(2) E.
F.
4 days
1 day

Demand
D(2) E(1) D(3) F(2) Day 10 50 A
Day 8 20 B (Spares)
Day 6 15 D (Spares)
Next, we need to start scheduling the components that make up “A”.
In the case of component “B” we need 4 B’s for each A. Since we need 50
A’s, that means 200 B’s. And again, we back the schedule up for the
necessary 2 days of lead time.

Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
Order Placement 50
B Required 20 200
Order Placement 20 200

A 4x50=200

B(4) C(2)

D(2) E(1) D(3) F(2)

 Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
LT=1 Order Placement 50
B Required 20 200
LT=2 Order Placement 20 200
C Required
LT=1 Order Placement
D Required
LT=3 Order Placement
E Required
LT=4 Order Placement
Finally, repeating the process for all components, we have the final materials requirements plan:

Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
LT=1 Order Placement 50
B Required 20 200
LT=2 Order Placement 20 200
C Required 100
LT=1 Order Placement 100
D Required 55 400 300
LT=3 Order Placement 55 400 300
E Required 20 200
LT=4 Order Placement 20 200
F Required 200
LT=1 Order Placement 200
A
Part D: Day 6
B(4) C(2)
40 + 15 spares

D(2) E(1) D(3) F(2)

 Manufacturing Resource
Planning (MRP II)
This is a development that seeks to address some of the shortcomings of MRP. It
includes all of the elements of MRP, it: is based around the Bill of Materials,
uses a Master Production Schedule (MPS)
MRP II includes feedback from the shop floor on how the work has progressed, to all
levels of the schedule so that the next run can be updated on a regular basis. For
this reason it is sometimes called 'Closed Loop MRP'.
Distribution resource planning
Distribution resource planning (DRP) is a method
used in business administration for planning orders
within a supply chain. DRP enables the user to set
certain inventory control parameters (like a safety
stock) and calculate the time-phased inventory
requirements.
Capacity Requirement Planning
(CRP) is the process of determining what personnel
and equipment capacities (times) are needed to meet
the production objectives embodied in the master
schedule and the material requirements plan.
Scheduling
Process of arranging, controlling and optimizing work and workloads in
a production process or manufacturing process.
Allocate plant and machinery resources, plan human resources, plan
production processes and purchase materials.
Minimize the production time and costs, by telling a production facility
when to make, with which staff, and on which equipment. Production
scheduling aims to maximize the efficiency of the operation and reduce
costs.
Loading
A load means the quantity of work, and allocating the
quantity of work to the processes necessary to
manufacture each item is called loading.
Gantt Chart
A Gantt chart, or harmonogram, is a type of bar chart that illustrates a
project schedule.
This chart lists the tasks to be performed on the vertical axis, and time
intervals on the horizontal axis.
The width of the horizontal bars in the graph shows the duration of
each activity.
Gantt charts illustrate the start and finish dates of the terminal
elements and summary elements of a project..
UNIT 4

Inventory Management
Inventory management is the branch of
business management that covers the
planning and control of the inventory.
Inventory planning and
control
Planning on What Forecasting
Inventory to Stock and Parts/Product Controlling
How to Acquire It Demand Inventory Levels

Feedback Measurements to
Revise Plans and
Forecasts
Introduction
🠶Inventory is an expensive and important asset to many companies.
🠶Inventory is any stored resource used to satisfy a current or future need.
🠶Common examples are raw materials, work-in-process, and finished goods.
🠶Most companies try to balance high and low inventory levels with cost
minimization as a goal.
🠶 Lower inventory levels can reduce costs.
🠶 Low inventory levels may result in stock outs and dissatisfied customers.
Introduction
All organizations have some type of inventory control system.
Inventory planning helps determine what goods and/or services need to be
produced.
Inventory planning helps determine whether the organization produces the
goods or services or whether they are purchased from another organization.
Inventory planning also involves demand forecasting.
Inventory
Classes Materials flow

suppliers manufacturing customers

raw materials work-in-process (WIP). finished goods

The progressive states of a material

SEMI-FINISHED goods
Maintenance, Repair, and Operational Supplies (MRO)
Items used in support of general operations and
maintenance such as maintenance supplies, spare parts,
and consumables used in the manufacturing process and
supporting operations. These items are used in
production but do not become part of the product.
Inventory
Functions
Safety Stock – Safety stock is also called buffer stock.
Lot-size Inventory- quantity price discounts, reduce shipping and setup costs
De-coupling stock
Pipeline Inventory
Anticipation Inventory
Hedge Inventory
Importance of Inventory Control
🠶Five uses of inventory:
🠶 The decoupling function
🠶 Storing resources
🠶 Irregular supply and demand
🠶 Quantity discounts
🠶 Avoiding stockouts and shortages
🠶Decouple manufacturing processes.
🠶 Inventory is used as a buffer between stages in a manufacturing process.
🠶 This reduces delays and improves efficiency.
 Importance of Inventory Control
🠶Storing resources.
🠶 Seasonal products may be stored to satisfy off-season demand.
🠶 Materials can be stored as raw materials, work-in-process, or finished
goods.
🠶 component of partially completed subassemblies.
🠶Compensate for irregular supply and demand.
🠶 Demand and supply may not be constant over time.
🠶 Inventory can be used to buffer the variability.

OSCM- Iftekhar khan :

2020
Importance of Inventory Control
🠶Take advantage of quantity discounts.
🠶 Lower prices may be available for larger orders.
🠶 Extra costs associated with holding more inventory must be
balanced against lower purchase price.
🠶Avoid stockouts and shortages.
🠶 Stockouts may result in lost sales.
🠶 Dissatisfied customers may choose to buy from another
supplier.
Inventory Decisions
🠶 There are two fundamental decisions in controlling inventory:
🠶 How much to order.
🠶 When to order.
🠶 The major objective is to minimize total inventory costs.
🠶 Common inventory costs are:
🠶 Cost of the items (purchase or material cost).
🠶 Cost of ordering.
🠶 Cost of carrying, or holding, inventory.
🠶 Cost of stockouts.
 Inventory Cost Factors

ORDERING COST FACTORS CARRYING COST FACTORS

Developing and sending purchase orders Cost of capital
Processing and inspecting incoming inventory Taxes
Bill paying Insurance
Inventory inquiries Spoilage
Utilities, phone bills, and so on, for the
Theft
purchasing department
Salaries and wages for the purchasing Obsolescence
department employees
Supplies, such as forms and paper, for the purchasing
Salaries and wages for warehouse employees
department
Utilities and building costs for the warehouse

Supplies, such as forms and paper, for the warehouse

Inventory Cost Factors
🠶 Ordering costs are generally independent of order quantity.
🠶 Many involve personnel time.
🠶 The amount of work is the same no matter the size of the order.
🠶 Carrying costs generally varies with the amount of inventory, or the
order size.
🠶 The labor, space, and other costs increase as the order size
increases.
🠶 The actual cost of items purchased can vary if there are quantity
discounts available.
 Economic Order Quantity
🠶 The economic order quantity (EOQ) model is one of
the oldest and most commonly known inventory
control techniques.
🠶 It is easy to use but has a number of important
assumptions.
🠶 Objective is to minimize total cost of inventory.
 Economic Order Quantity
Assumptions:
1. Demand is known and constant.
2. Lead time is known and constant.
3. Receipt of inventory is instantaneous.
4. Purchase cost per unit is constant throughout the year.
5. The only variable costs are the cost of placing an order, ordering cost, and
the cost of holding or storing inventory over time, holding or carrying cost,
and these are constant throughout the year.
6. Orders are placed so that stockouts or shortages are avoided completely.
 Inventory Usage Over Time
Inventory
Level
Order Quantity = Q = Maximum
Inventory Level

Minimum
Inventory
0
Time
 Inventory Costs in the EOQ
Situation A v e r a g e i n v e n t o r y l e v e l 2
 Q
INVENTORY LEVEL
DAY BEGINNING ENDING AVERAGE
April 1 (order received) 10 8 9
April 2 8 6 7
April 3 6 4 5
April 4 4 2 3
April 5 2 0 1
Maximum level April 1 = 10 units
Total of daily averages = 9 + 7 + 5 + 3 + 1 = 25
Number of days = 5, Average inventory level = 25/5 = 5 units
Inventory Costs in the EOQ
Situation
Q = number of pieces to order
EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory item
Co = ordering cost of each order
Ch = holding or carrying cost per unit per year
Number of orders Ordering
Annual ordering cost  placed per  cost per
year order

D
 Q Co
Inventory Costs in the EOQ
Situation
Mathematical equations can be developed using:

Q = number of pieces to order

EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory item
Co = ordering cost of each order
Ch = holding or carrying cost per unit per year
Average Carrying cost per
Annual holding cost  inventory  unit per year

 2Q C h
Inventory Costs in the EOQ
Situation Total Cost as a Function of Order
Quantity
Cost
Curve of Total Cost of
Carrying and
Ordering

Minimum
Total
Cost Carrying Cost Curve
Ordering Cost Curve

Order Quantity
Optimal Order
Quantity
Finding the EOQ
According to the graph, when the EOQ assumptions are met,
total cost is minimized when annual ordering cost equals annual
holding cost.
Solving for Q DC Q C
Q o  2 h 2 D Co  Q 2 C h

2DCo 2DCo
 Q2  Q  EOQ  Q
Ch Ch *
Economic Order Quantity (EOQ)
Model Summary of equations:

Annual ordering cos D C o

t  Q

Q
A n n u a l holding c o s t 
2 h

C
2DCo
EOQ  Q*
 Ch
Sumco Pump Company
🠶Sumco Pump Company sells pump housings to other companies.
🠶The firm would like to reduce inventory costs by finding optimal
order quantity.
🠶 Annual demand = 1,000 units and cost of per unit is $ 100
🠶 Ordering cost = $10 per order
🠶 Average carrying cost per unit per year = $0.50

2 DC o  2(1,000)(10) 
Q*  Ch 0.50
40,000  200 units
 Sumco Pump Company
Total cost  Material cost + Ordering cost + Holding cost

D C  QC
To t a l c o s t D C  Q o
2 h

 1 0 0 0  1 0 0  12,0000 0 ( 1 0 )  2 2 0 0 ( 0
.5)
100000  50  50
100100
 Total cost  D C o
 QC h
Q 2
D
C

80000*50 +80000/8000*1200+8000/2*3
ABC Ltd. uses EOQ logic to determine the order quantity
for its various components and is planning its orders. The
Annual consumption is 80,000 units, Cost to place one
order is Rs. 1,200, Cost per unit is Rs. 50 and carrying cost
is 6% of Unit cost. Find EOQ, No. of order per year,
Ordering Cost and Carrying Cost and Total Cost of
Inventory.
Midwest Precision Control Corporation is trying to decide between two
alternate Order Plans for its inventory of a certain item. Irrespective of the plan
to be followed, demand for the item is expected to be 1,000 units annually.
Under Plan 1st, Midwest would use a teletype for ordering; order costs would
be Rs. 40 per order. Inventory holding costs (carrying cost) would be Rs. 100
per unit per annum. Under Plan 2nd order costs would be Rs. 30 per order. And
holding costs would 20% and unit Cost is Rs. 480. Find out EOQ and Total
Inventory Cost than decide which Plan would result in the lowest total inventory
cost?
A local TV repairs shop uses 36,000 units of a part each year (A maximum consumption
of 100 units per working day). It costs Rs. 20 to place and receive an order. The
shop orders in lots of 400 units. It cost Rs. 4 to carry one unit per year of inventory.

Requirements:
(1) Calculate total annual ordering cost
(2) Calculate total annual carrying cost
(3) Calculate total annual inventory cost
(4) Calculate the Economic Order Quantity
(5)Calculate the total annual cost inventory cost using EOQ inventory Policy
(6) How much save using EOQ
(7) Compute ordering point assuming the lead time is 3 days d*L
Purchase Cost of Inventory
Items
Inventory carrying cost is often expressed as an annual percentage
of the unit cost or price of the inventory.
This requires a new variable.
Annual inventory holding charge as a
I percentage of unit price or cost
 The cost of storing inventory for one year is then

C h  IC

2DCo
thus, Q*  IC
Sensitivity Analysis with the EOQ
Model
🠶The EOQ model assumes all values are know and fixed over time.
🠶Generally, however, some values are estimated or may change.
🠶Determining the effects of these changes is called sensitivity
analysis.
🠶Because of the square root in the formula, changes in the inputs
result in relatively small changes in the order quantity.

2DCo
EOQ 
Ch
Sensitivity Analysis with the
EOQ Model
🠶In the Sumco Pump example:
EOQ  2 ( 1 , 000 )( 10 )  2 0 0 u n i
0 .5 0
 If the ordering cost were increasedt four
s times from $10 to $40, the order quantity would only
double

EOQ  2 ( 1 , 000 )( 40 )  4 0 0 u n i
0 .5 0
 t ssquare root of the change to any of the inputs.
In general, the EOQ changes by the
 Reorder Point: Determining When To Order

🠶Once the order quantity is determined, the next decision is when to order.
🠶The time between placing an order and its receipt is called the lead time (L)
or delivery time.
🠶When to order is generally expressed as a reorder point (ROP).

Demand per Lead time for a new order

ROP 
day in days

dL
Procomp’s Computer Chips

Demand for the computer chip is 8,000 per year.

Daily demand is 40 units.
Delivery takes three working days.
ROP  d  L  40 units per day  3 days
 120 units

 An order based on the EOQ calculation is placed when the inventory reaches
120 units.
 The order arrives 3 days later just as the inventory is depleted.
 Quantity Discount Models

🠶Quantity discounts are commonly available.

🠶The basic EOQ model is adjusted by adding in the purchase or materials cost.
Total cost  Material cost + Ordering cost + Holding cost

D C  QC
To t a l c o s t D C  Q o
2 h

where
D  annual demand in units
Co  ordering cost of each
order
CC  cost
h  holding or per unit cost per unit per
carrying
year
Quantity Discount Models

Because unit cost is now variable,

Holding cost  Ch  IC
Ic holding cost as a percentage of the unit cost (C)
T

tal cost  MaterialTo

cost  Q
DHolding
owhere t a +l cOrdering
o s t Dcost
C  +Q C o 2cost
Ch
D  annual demand in units
Co  ordering cost of each order
C  cost per unit
Ch  holding or carrying cost per unit per
year
 Quantity Discount Models
🠶A typical quantity discount schedule can look like the table below.
🠶However, buying at the lowest unit cost is not always the best
choice.
DISCOUN
T DISCOUNT QUANTITY DISCOUNT (%) DISCOUNT COST ($)
NUMBER
1 0 to 999 0 5.00

2 1,000 to 1,999 4 4.80

3 2,000 and over 5 4.75

Brass Department Store
🠶Brass Department Store stocks toy race cars.
🠶Their supplier has given them the quantity discount schedule
shown
🠶 Annual demand is 5,000 cars, ordering cost is $49, and holding cost is 20%
of the cost of the car
🠶The first step is to compute EOQ values for each discount.
( 2 )( 5 , 0 0 0 )
EOQ1   700 cars p e r o r d e
( 49 ) r
( 0 . 2 )( 5 . 00 )
EOQ  ( 2 )( 5 , 0 0 0 )
2
 714 c a r s p e o r d e
( 49 ) r r
EOQ  ( 0 .2 ) ( 4 .8 0 )
3
( 2( )0( .52, )0( 04 0. )
 718 cars p e r o r d e
( 4795) )
r
Brass Department Store Example
🠶The second step is adjust quantities below the allowable discount
range.
🠶The EOQ for discount 1 is allowable.
🠶The EOQs for discounts 2 and 3 are outside the allowable range
and have to be adjusted to the smallest quantity possible to
purchase and receive the discount:
Q1  700
Q2  1,000
Q3  2,000
Brass Department Store
The third step is to compute the total cost for each quantity.

ANNUAL ANNUAL ANNUAL

UNIT ORDERIN
DISCOUN ORDER MATERI G COST CARRYI
T PRIC QUANTITY A L ($) N G TOTAL ($)
NUMBE E (Q) COST = (D/Q)Co COST
R (C) ($) ($)
= DC = (Q/2)Ch
1 $5.00 700 25,000 350.00 350.00 25,700.00

2 4.80 1,000 24,000 245.00 480.00 24,725.00

3 4.75 2,000 23,750 122.50 950.00 24,822.50

The final step is to choose the alternative with the lowest total cost.
BIKO is a bike retailer located in the outskirts of Paris.
BIKO purchases bikes from PMX in orders of 250 bikes which is the current economic order quantity.
PMX is now offering the following bulk discounts to its customers:
2% discount on orders above 200 units
4% discount on orders above 500 units
6% discount on orders above 600 units
BIKO is wondering if the EOQ model is still the most economical and whether increasing the order size would actually
be more beneficial.
Following information is relevant to forming the decision:
Annual demand is 5000 units
Ordering cost is $100 per order
Annual holding cost is comprised of the following:
• 5% insurance premium for the average inventory held during the year calculated using the net purchaseprice
• Warehousing cost of $6 per unit
Purchase price is $200 per unit before discount
 ABC Analysis
🠶The purpose of ABC analysis is to divide the inventory into three
groups based on the overall inventory value of the items.
🠶Group A items account for the major portion of inventory costs.
🠶 Typically about 70% of the dollar value but only 10% of the quantity of
items.
🠶 Forecasting and inventory management must be done carefully.

🠶Group B items are more moderately priced.

🠶 May represent 20% of the cost and 20% of the quantity.
🠶Group C items are very low cost but high volume.
🠶 It is not cost effective to spend a lot of time managing these items.
 ABC

A B C
Highly Important Moderately Less Important
Important

% Value 70% 20% 10%

20% 70%
% Quantity 10%
 Summary of ABC
Analysis

INVENTORY DOLLAR USAGE INVENTORY ARE QUANTITATIVE CONTROL TECHNIQUES

GROUP (%) ITEMS (%) USED?

A 70 10 Yes

B 20 20 In some cases

C 10 70 No
 Products Value in Rs.
Product 1 20
Product 2 76
Product 3 90
Product 4 320
Product 5 120
Product 6 10
Product 7 400
Product 8 25
Product 9 43
Product 10 16
Product 11 32
Product 12 60
Product 13 78
Product 14 234
Product 15 154
Item No. Consumption
Qty Price/unit
R-016 2500 200.00
R-004 1400 325.00
R-012 5000 200.00
R-006 2000 320.00
R-007 4500 50.00
R-009 900 325.00
R-019 2000 100.00
R-010 3000 44.00
R-011 1300 100.00
R-003 400 320.00
R-013 600 200.00
R-014 2000 50.00
R-015 2000 325.00
R-008 2346 200.00
R-017 5200 320.00
R-018 2000 200.00
R-005 450 325.00
 FSN
Analysis:-
FSN stands for FAST MOVING , SLOW MOVING and NON-MOVING. Here,
classification is based on the pattern of issues from stores and is useful in
controlling obsolescence.
To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is
later, is taken to determine the number of months, which have lapsed since the last
transaction. The items are usually grouped in periods of 12 months.
FSN analysis is helpful in identifying active items which need to be reviewed regularly
and surplus items which have to be examined further. Non-moving items may be
examined further and their disposal can be considered.
SOS
Classification:-
Raw materials, especially agricultural inputs are generally classified by the seasonal, off-
seasonal systems since the prices during the season would generally be lower.
The seasonal items which are available only for a limited period should be procured and
stocked for meeting the needs of the full year. The prices of the seasonal items which are
available throughout the year are generally less during the harvest season.
The quantity required of such items should, therefore, be determined after comparing
the cost savings on account of lower prices, if purchased during season, with the higher cost
of carrying inventories if purchased throughout the year.
A Buying and stocking strategy for seasonal items depend on a large number of
factors and more and more sophistication is taken place in this sphere and operational
techniques are used to obtain optimum results.
 XYZ
Analysis:-
While the ABC analysis is based on the assumption on value, XYZ analysis is
based on the value of inventory undertaken during the closing of annual
accounts. X items are those having high value, Y items are those whose
inventory values are medium and Z items are those whose inventory values are
low.
The percentages are similar to ABC analysis. This analysis helps find items
with heavy stock.
GOLF
Classification:-
The letter stands for
Government,
Ordinary,
Local
and
Foreign.
There are mainly imported items which are canalized through the State Trading Corporation
(STC) Minerals and Metals Trading Corporation, etc. Indian Drugs and Pharmaceutical Ltd
(IDPL), Mica trading corporation etc. These are special procedures of inventory control which
may not applicable to ordinary items as they require special procedures.
MNG
Analysis:-
The grouping of inventory items in this analysis takes place as:
M- Moving items – The items which are consumed from time to time are normally referred to as
moving items.
N- Non moving items – These items which are not and consumed in last one year are covered
under this group.
G- Ghost items – This group refers to such items which neither have been received nor issued
during the year. The balance of such items shown in stock registers of the organization will be
nil, both at the beginning and at the end of the previous financial year.
VED
Basis of Criticality
Vital
Essential
Desirable
HML
High Value
Medium Value
Low Value
Inventory turns ratios
An efficient company keeps the least inventory on hand to make the sales it does.
Goods are available when required and spend the least amount of time waiting in a
warehouse.
Capital & opportunity cost,.
Michael Dell revolutionized the computer industry with his made-to-order business model- zero
inventories
Inventory is a make or break item in the financials of a company, there is obviously an interest
amongst analysts and investors who want to have a close watch on its performance.
Hence, the inventory turnover ratio is amongst their favorites.
 Cost Of Goods
Inventory Turnover Ratio
Sold
Average Inventory
=

Average Inventory = (Beginning Inventory + Ending Inventory)

2

Instead of Sales, Cost of Goods Sold is used to calculate this specific

turnover ratio. This is because inventories are stored at cost price.
Inventory turnover ratio needs to
be compared with the performance
of others. Usually the comparison
is done between:
The company’s own inventory turnover ratio for previous years.
The inventory turnover ratio of other companies in the same or different industry.
Different industries are usually considered in the calculation of inventory turnover
ratio.
This is because the best practices can usually be applied regardless of the industry.
Dell’s made to order business model has been replicated countless times in different
industries.
“Inventory Turnover Ratio helps in evaluating
HOW WELL THE MANAGEMENT IS
WORKING
in managing the inventory and generating
sales
from it”
It is the measure of HOW QUICKLY
YOUR BUSINESS SELLS through its
inventory in a given period of time
and needs to replace it again
Inventory turnover is a financial
ratio which depends on

Cost of Goods
Average
Sold
(COGS)
Inventory
Deciding the Inventory
Turnover Period
The time period can range from one single day or an
entire year or it can be a particular week.
We cannot CALCULATE INVENTORY TURNOVER
AT A PARTICULAR INSTANT
Calculating the Cost of Goods
Sold( COGS)
Cost of goods sold is the direct total expense associated
with the production of goods sold or the cost of the goods
you ACQUIRE TO SELL TO THE CUSTOMERS
Inventory turnover period
Inventory turnover period in simple words is also known as
the AVERAGE NUMBER OF DAYS REQUIRED TO SELL
A PRODUCT
Inventory turnover
Ration Interpretation
High inventory turnover indicates fast moving
inventories and efficient operations
Low inventory turnover indicates that the company’s
goods are spending a lot of time being stored in the
warehouse
Items with high turnover are good because there are MANY
PRODUCTS THAT TEND TO EXPIRE SOON or get out of
season quickly
Republican Manufacturing Co. has a cost of goods sold of
$5M for the current year. The company’s cost of beginning
inventory was $600,000 and the cost of ending inventory
was $400,000.

inventory turnover is rated at 10 times a year.

Inventory turnover
days
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑑𝑎𝑦𝑠 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼 𝑛𝑣𝑒𝑛𝑡𝑜 𝑟𝑦
x365
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠
𝑆𝑜𝑙𝑑

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑑𝑎𝑦𝑠 = 60000+40000)/2

5000000 x
365

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑑𝑎𝑦𝑠 36.5 Days

Calculate inventory turnover and days inventories on hand for ABC, Inc.
based on the information given below:

Opening inventories $25,000

Closing inventories $30,000
Cost of goods $245,000
manufactured
Inventory Systems/Model
Inventory systems answer the questions: When to order and how much to
order
There are two categories:
Fixed-Order Quantity System – an order of fixed quantity,
Q, is placed when inventory drops to a reorder point,
ROP
Fixed-Time Period System – inventory is checked in fixed
time periods, T, and the quantity ordered varies
Fixed Order quantity
Model
–assumes a constant demand rate of d
–the inventory position, IP, is reduced by a rate of d
–order placed when the reorder point, ROP is reached
–when inventory is received, the IP is increased by the
order quantity, Q
–there is a lead time, L, during which we have to wait for
the order
–inventory is checked on a continual basis
–Q is computed as the economic order quantity, EOQ
Fixed-Time Period System
–inventory levels checked in fixed time periods, T
–a target inventory level, R, is restored when order
received
–sometimes called Periodic Review System
–quantity ordered varies: Q = R – IP where: Q = order
quantity R = target inventory level IP = inventory position
Vendor Managed Inventory
(VMI)
VMI arrangements have the vendor responsible for managing the inventory
located at a customer’s facility
The vendor:
–stocks inventory
–places replenishment orders
–arranges the display
–typically owns inventory until purchased
–is required to work closely with customer
UNIT 5:

Supply
Chain
Management
Supply chain concept,
Generalized Supply Chain Management Model –
Key Issues in SCM – Collaboration, Enterprise Extension, responsiveness,
Cash to Cash Conversion.
Customer Service: Supply Chain Management and customer service linkages,
Availability service reliability perfect order, customer satisfaction.
Enablers of SCM - Facilities, Inventory, Transportation, Information, sourcing,
Pricing.
 What is a Supply Chain?
Flow of Products and Services from:
Integration Information

Intermediate
End Product Wholesalers & Retailers
Products
Manufacturers Distributors
Manufacturers
Raw Material
Manufacture
Storage
Transporters Activities

Planning
 What Is Supply Chain Management?
A set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores,
so that merchandise is produced and distributed at
the right quantities, to the right locations, and at the
right time, in order to minimize system wide costs
while satisfying service level requirements.
 Suppliers Right Quantity

Produce Distributed
Manufacturers Right Location
Merchandise
Warehouses Right Time

Stores Max. Customer

Minimum Cost
Satisfaction
Two Other Formal Definitions
The design and management of seamless, value added process
across organizational boundaries to meet the real needs of the end
customer.- Institute for Supply Management
Managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory tracking,
order entry and order management, distribution across all
channels, and delivery to the customer.- The Supply Chain Council
Strategi
Product Innovation Customer
c Focus
Operation Relations
Software Companies
Global
Logistic
Companies

Contract
Companies

Component Final
and Product

Manufactures Distributors Retailers

Makers PC Customers
/OEM
Companies
Flow

Component Local
Distributors Assemblers

Activities Manufacturing Assembly Distributio Sales, Services,

R&D n Support
Key Observations in SC
• Every Facility that impact cost need to be considered.
• Supplier's – Supplier
• Customer’s - Customer
• Efficiency and Cost –effectiveness through out the system is required
• System Level Approach
• Multiple level of activities
• Strategic-Tactical-
Operational
Other Related
Observations
• Supply chain strategy cannot be determined in isolation.
Supply chain strategy linked to the Development Chain.
• Challenging to minimize system costs and maximize
system service levels. The chain has many players.
• Inherent presence of uncertainty and risk; demand
forecasts and lead times are often uncertain.
The Development Chain
• Set of activities and processes associated with new
product introduction. Includes:
• product design phase
• associated capabilities and knowledge
• sourcing decisions
• production plans