Industrial Engineering & Production Management

7/27/2019 Industrial Engineering & Production Management

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CONCEPT

Productivity is the quantitative relation between what we produce and what we use as aresource to produce them, i.e., arithmetic ratio of amount produced (output) to the

amount of resources input. Productivity can be expressed as:

Productivity = Output !nput

Productivity refers to the efficiency of the production system. !t is the concept that "uidesthe mana"ement of production system. !t is an indicator of how well the factors of

production (#and, $apital, labour and ener"y) are utilised.

%uropean Productivity &"ency (%P&) has defined productivity as,

Productivity is an attitude of mind. It is the mentality of progress, of the constant

improvements of that which eists. It is the certainty of !eing a!le to do !etter today

than yesterday and continuously. It is the constant adaptation of economic andsocial life to changing conditions. It is the continual effort to apply new techni"ues

and methods. It is the faith in human progress.#

& ma'or problem with productivity is that it means many thin"s to many people.

%conomists determine it from ross ational Product (P), *ana"ers view it as costcuttin" and speed up, en"ineers thin+ of .it in terms of more output per hour. ut

"enerally accepted meanin" is that it is the relationship between "oods and services

produced and the resources employed in their production.

Productivity as $iewed !y %ifferent People

%$OO*!--

&$$O/&- %0&1!O/2

-$!%!-- %!%%2-

2atio of output to input (partial productivity

*easure and otal Productivity *easure)

3inancial 2atios, ud"etary 1ariances

#abour /tilisation (*an days)

$apacity /tilisation, Production per *an hour,

*anpower efficiency

%E&INITION' O& P(O%)CTI$IT*

4. Productivity is a function of providin" more and more of everythin" to more and

more people with less and less consumption of resources.

5. he volume of output attained in a "iven period of time in relation to the sum of

the direct and indirect efforts expended in its production.


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6. Productivity is the measure of how well the resources are brou"ht to"ether in an

or"anisation and utilised for accomplishin" a set of ob'ectives.

7. Productivity is concerned with establishin" con"ruency between or"anisational

"oals with societal aspirations throu"h input8output relationship.

9. Productivity is the multiplier effect of efficiency and effectiveness.

P(O%)CTION +N% P(O%)CTI$IT*

Production is defined as a process or procedure to transform a set of input into output

havin" the desired utility and quality. Production is a value addition process. Production

system is an or"anised process of conversion of raw materials into useful finishedproducts represented as in 3i". 5.4.

Production system.

he concept of production and productivity are totally different production refers to

absolute output whereas productivity is a relative term where in the output is always

expressed in terms of inputs. !ncrease in production mayor may not be an indicator ofincrease in productivity. !f the production is increased for the same output, then there is

an increase in productivity.

Productivity can !e increased.

4. hen production is increased without increase in inputs.

5. he same production with decrease in inputs.

6. he rate of increase in output is more compared to rate of increase in input.

P(O%)CTI$IT* E+')(E'

!P/ O/P/2&-3O2*&!O P2O$%--

*%

*&$0!%-

*&%2!-*O%;

*&&%*%

!3O2*&!O%%2;

OO


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Partial Productivity easures -PP

material > capital ener"y > otherinputs) used

he word tan"ible here refers to measurable.

he output of the firm as well as the inputs must be expressed in a common measurementunit. he best way is to express them in rupee value. o compare productivity, indices are

be ad'usted) the base year, and must be stated in terms of base year rupee value. his is

referred to as deflatin" the input and output factors.


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5. 0elps to find out the performance and productivity of the operational unit.

6. 0elps to plan, evaluate and control.

7. &n important information to strate"ic planners re"ardin" expansion or phasin" out

decisions.

Total &actor Productivity easure -T&P

!t is the ratio of net output to the labour and capital (factor) input.

otal 3actor Productivity = et output #abour > capital !nputs


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&+CTO(' IN&/)ENCIN0 P/+NT /OC+TION

1. Proimity to ar2ets3

%very company is expected to serve its customers by providin" "oods and services at the

time needed and at reasonable price or"anisations may choose to locate facilities close to

the mar+et or away from the mar+et dependin" upon the product. hen the buyers for theproduct are concentrated, it is advisable to locate the facilities close to the mar+et.

#ocatin" nearer to the mar+et is preferred if

(i) he products are delicate and susceptible to spoila"e.

(ii) &fter sales services are promptly required very often.

(iii) ransportation cost is hi"h and increase the cost si"nificantly.

(iv) -helf life of the product is low.

earness to the mar+et ensures a consistent supply .of "oods to customers and reduces

the cost of transportation.

4. 'upply of raw material3

!t is essential for the or"anisation to "et raw material in ri"ht qualities and time in order tohave an uninterrupted production. his factor becomes all the important if the materials

are perishable and cost of transportation is very hi"h.

eneral "uidelines su""ested re"ardin" effects of raw materials on plant location is:

(a) hen a sin"le raw material is used without loss of wei"ht, locate the plant at theraw material source, at the mar+et or at any point in between.

(b) hen wei"ht loosin" raw material is demanded, locate the plant at the raw

material source.

(c) hen raw material is universally available, locate close to the mar+et area.

-o the "eneral "uideline is ?earness to source of raw material is of special importance

when he material is bul+y in relation to its value and when the volume and wei"hts are

si"nificantly reduced durin" the processin".@ he place of production is li+ely to be at the


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place of consumption where the final product is more expensive to carry because it is

more bul+y, fra"ile and perishable.

!f the raw materials are processed from variety .of locations, the plant may be situated so

as to minimise total transportation costs.

earness to raw material is important in case of industries such as su"ar, cement, 'ute and

cotton textiles.

5. Transport facilities3

-peedy transport facilities ensure timely supply of raw materials to the company and

finished "oods to the customers. he transport facility is a prerequisite for the location ofthe plant. here are five basic modes of physical transportation, air, road, rail, water and

pipeline. oods that are mainly intended for exports demand a location near to the port or

lar"e airport. he choice of transport method and hence the location will depend on

relative costs, convenience, and suitability. hus transportation cost to value added is oneof the criteria for plant location.

6. Infrastructure availa!ility3

he basic infrastructure facilities li+e power, water and waste disposal, etc., become theprominent factors in decidin" the location.

$ertain types of industries are power hun"ry e."., aluminium and steel and they should be

located close to the power station or location where uninterrupted power supply isassured throu"hout the year. he non8availability of power may become a survival

problem for such industries. Process industries li+e paper, chemical, cement, etc., require

continuous supply of water in lar"e amount and "ood quality, and mineral content ofwater becomes an important factor.

aste disposal facilities for process industries is an important factor which influences theplant location.

7. /a!our and wages3

he problem of securin" adequate number of labour and with s+ills specific is a factor to

be considered both at territorial as well as at community level durin" plant location.

!mportin" labour is usually costly and involve administrative problem. he history oflabour relations in a prospective community is to be studied. Prospective community is to

be studied. Productivity of labour is also an important factor to be considered. Prevailin"

wa"e pattern, cost of livin" and industrial relation and bar"ainin" power of the unionsforms the important considerations.

8. /aw and taation3


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he policies of the state "overnments and local bodies concernin" labour laws, buildin"

codes, safety, etc., are the factors that demand attention.

!n order to have a balanced re"ional "rowth of industries, both central and state

"overnments in our country offer the pac+a"e of incentives to entrepreneurs in particular

locations.

he incentive pac+a"e may be in the form of exemption from a sales tax and excise

duties for a specific period, soft loan from financial institutions, subsidy in electricitychar"es and investment subsidy. -ome of these incentives may tempt to locate the plant to

avail these facilities offered.

9. 'uita!ility of land and climate3

he "eolo"y of the area needs to be considered to"ether with climatic conditions

(humidity, temperature). $limate "reatly influence human efficiency and behaviour.

-ome industries require specific climatic conditions e."., textile mill will requirehumidity.

ow, with the development in air8conditionin" facilities the climatic condition can be

controlled but at a hi"h cost. .

:. 'upporting industries and services3

ow8a8days the manufacturin" or"anisation will not ma+e all the components and parts

by itself and it subcontracts the wor+ to vendors. -o, the source of supply of componentparts will be the one of the factors that influences the location.

he various services li+e communications. ban+in" services professional consultancyservices and other civil amenities services will play a vital role in selection of a location.

;. Community and la!our attitudes3

$ommunity attitude towards their wor+ and towards the prospective industries can ma+e

or mar the industry. $ommunity attitudes towards supportin" union activities is an

important criteria.

3acility location in specific location is not desirable even thou"h all factors are favourin"

use of labour attitude towards mana"ement, which brin"s very often the stri+es and loc+8outs.

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C+P+CIT* +N+0EENT

he ob'ective of capacity mana"ement (i.e., plannin" and control of capacity) is to matchthe level of operations to the level of demand.

$apacity plannin" is to be carried out +eepin" in mind future "rowth and expansionplans, mar+et trends, sales forecastin", etc. !t is a simple tas+ to plan the capacity in case

of stable demand. ut in practice the demand will be seldom stable. he fluctuation of

demand creates problems re"ardin" the procurement of resources to meet the customer

demand. $apacity decisions are strate"ic in nature. $apacity is the rate of productivecapability of a facility. $apacity is usually expressed as volume of output per period of

time.

Production mana"ers are more concerned about the capacity for the followin" reasons:

-ufficient capacity is required to meet the customers demand in time.

$apacity affects the cost efficiency of operations.

$apacity affects the schedulin" system.

$apacity creation requires an investment.

Capacity planning is the first step when an organisation decides to produce more or

new products.

E+')(EENT O& C+P+CIT*

!t is easy and simple to measure the capacity of the unit manufacturin" homo"eneoustan"ible products, which can be counted. he capacity of such units can be expressed in

number of units of output per period. 3or example, the capacity of an automobile unit is

expressed as number of vehicles produced per month. he capacity of steel plant isexpressed as millions of tons per annum. $apacity of textile mill is expressed as metres of

cloth per day.

!t is difficult to express capacities when the company manufactures multiple products andsome of the products requirin" common facilities and others specialised facilities. !n this

situation measurin" capacity is more complicated. !n such situations, the capacity is not

expressed as output per period of time but usually expressed as roan8hours, machinehours or sometimes in terms of applicable resources.

Eamples


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& 'ob shop can measure its capacity in machine hours andor man8hours.

3or hospitals it is expressed as bed days per month.

he transport system is expressed in seat +ms per month.

E+')(E' O& C+P+CIT*

1= %esign capacity3


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5. /icensed capacity3

$apacity licensed by the various re"ulatory a"encies or "overnment authorities. his is

the limitation on the output exercised by the "overnment.

6. Installed capacity3

he capacity provided at the time of installation of the plant is called installed capacity.

7. (ated capacity3

$apacity based on the hi"hest production rate established by actual trials is referred to as

rated capacity.

E'TI+TIN0 &)T)(E C+P+CIT* NEE%'

$apacity requirements can be evaluated from two perspectives8lon"8term capacity

strate"ies and short8term capacity strate"ies.

1. /ong=term capacity strategies3

#on"8term capacity requirements are more difficult to determine because the future

demand and technolo"y are uncertain. 3orecastin" for 3ive or en years into the future is

more ris+y and difficult. %ven sometimes companyCs todayCs products may not beexistin" in the future. #on" ran"e capacity requirements are dependent on mar+etin"

plans, product development and life8cycle of the product. #on"8term capacity plannin" is

concerned with accommodatin" ma'or chan"es that affect overall level of the output in

lon"8term (more than one year). *ar+etin" environmental assessment and implementin"the lon"8term capacity plans in a systematic manner are the ma'or responsibilities of

mana"ement.

ultiple products3

$ompanyCs produce more than one product usin" the same facilities in order to

increase the profit. he manufacturin" of multiple products will reduce the ris+ offailure. 0avin" more than on product helps the capacity planners to do a better 'ob.

ecause products are in different sta"es of their life8cycles, it is easy to schedule them

to "et maximum capacity utilisation.


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Phasing in capacity3

!n hi"h technolo"y industries, and in industries where technolo"y developments arevery fast, the rate of obsolescence is hi"h. he products should be brou"ht into the

mar+et quic+ly. he time to construct the facilities will be lon" and there is no much

time as the products should be introduced into the mar+et quic+ly. 0ere the solution is

phase in capacity on modular basis. -ome commitment is made for buildin" fundsand men towards facilities over a period of 689 years. his is an effective way of

capitalisin" on technolo"ical brea+throu"h.

Phasing out capacity3

he outdated manufacturin" facilities cause excessive plant closures and down time.

he impact of closures are not limited to only fixed costs of plant and machinery.hus, the phasin" out here is done with humanistic way without affectin" the

community. he phasin" out options ma+es alternative arran"ements for men li+e

shiftin" them to other 'obs andor to other locations, compensatin" the employees,

etc.

4. 'hort=term capacity strategies3

*ana"ers often use forecasts of product demand to estimate the short8term wor+load the

facility must handle. *ana"ers loo+in" ahead up to 45 months, anticipate output

requirements for different products, and services. *ana"ers then compare requirementswith existin" capacity and then ta+e decisions as to when the capacity ad'ustments are

needed.

&+CTO(' IN&/)ENCIN0 E&&ECTI$E C+P+CIT*

he effective capacity is influenced by A (4) 3orecasts of demand, (5) Plant and labourefficiency, (6) -ubcontractin", (7) *ultiple shift operation, (9) *ana"ement policies.

1. &orecasts of demand3


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efficiency. he actual efficiency of the labour should be considered for calculatin"

efficiency. hus plant and labour efficiency are very much essential to arrive at realistic

capacity plannin".

5. 'u!contracting3

-ubcontractin" refers to off loadin", some of the 'obs to outside vendors thus hirin" the

capacity to meet the requirements of the or"anisation. & careful analysis as to whether to

ma+e or to buy should be done. &n economic comparison between cost to ma+e thecomponent or buy the component is to made to ta+e the decision.

6. ultiple shift operation3

*ultiple shifts are "oin" to enhance the firms capacity utilisation. ut specially in the

third shift the re'ection rate is hi"her. -pecially for process industries where investment is

very hi"h it is recommended to have a multiple shifts.

7. anagement policy3

he mana"ement policy with re"ards to subcontractin", multiplicity of shifts (decision

re"ardin" how may shifts to operate), which wor+ stations or departments to be run for

third shift, machine replacement policy, etc., are "oin" to affect the capacity plannin".

&+CTO(' &+$O)(IN0 O$E( C+P+CIT* +N% )N%E( C+P+CIT*

!t is very difficult to forecast demand as always there is an uncertainty associated with thedemand. he forecasted demand will be either hi"her or lower than the actual demand. -o

always there is a ris+ involved in creatin" capacity based on pro'ected demand. his "ives

rise to either over capacity or under capacity.

The over capacity is preferred when3

(a) 3ixed cost of the capacity is not very hi"h.

(b) -ubcontractin" is not possible because of secrecy of desi"n andor quality

requirement.

(c) he time required to add capacity is lon".

(d) he company cannot afford to miss the delivery, and cannot afford the loose the

customer.

(e) here is a economic capacity siDe below which it is not economical to operate the

plant.

The under capacity is preferred when3


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(a) he time to build capacity is short.

(b) -horta"e of products does not affect the company (i.e., lost sales can be

compensated).

(c) he technolo"y chan"es fast, i.e., the rate of obsolescence of plant and equipment

is hi"h.

(d) he cost of creatin" the capacity is prohibitively hi"h.

'T(+TE0IE' TO EET NON=)NI&O( %E+N%

1. 'trategy3 &bsorb demand fluctuations by varyin" inventory level, bac+ orderin"

or -hiftin" demand.

ethod Costs

Produce in earlier period and hold until

product is demanded.

$ost of holdin" inventory.

Offer to deliver the products later when

capacity is available


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increases recruitment, cost of additional shift, if

shift is added

#ayoff personnel as demand decreases. $ost of compensation to wor+ers for

layoff.

?*aterials 2equirement Plannin" (*2P) is a technique for determinin" the quantity and

timin" for the acquisition of dependent demand items needed to satisfy master productionschedule requirements.@

(P O>?ECTI$E'

1. Inventory reduction3

*2P determines how many components are required, when they are required in order to

meet the master schedule. !t helps to procure the materialscomponents as and whenneeded and thus avoid excessive build up of inventory.

4. (eduction in the manufacturing and delivery lead times3

*2P identifies materials and component quantities, timin"s when they are needed,availabilities and procurements and actions required to meet delivery deadline. *2P

helps to avoid delays in production and priorities production activities by puttin" due

dates on customer 'ob orders.

5. (ealistic delivery commitments3

y usin" *2P, production can "ive mar+etin" timely information about li+ely deliverytimes to prospective customers.

6. Increased efficiency3

*2P provides a close coordination amon" various wor+ centres and hence helps to

achieve uninterrupted flow of materials throu"h the production line. his increases theefficiency of production system.

&)NCTION' 'E($E% >* (P

1. Order planning and control3

hen to release orders and for what quantities of materialscomponents.

4. Priority planning and control3

0ow the expected date of availability is compared to the need date for each component.


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6. Provision of a basis for plannin" capacity requirements and developin" a broad

business plans.

he followin" questions are addressed in *2P processin":

4. hat do we want to produce, and

when.

A Provided by *aster Production -chedule

5. hat component are required toma+e it and how many.

A ill of *aterials (O*)

6. 0ow many are already scheduled

to be available in each future

period.

A !nventory status file

7. 0ow many more we need to

obtain for each future period.

A


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:. (e"uirements eplosion3 he brea+in" down of (explodin") parent items into

component parts that can be individually planned and

scheduled.

;. 'cheduled receipts3 he quantity of an item that will be received from suppliers

as a result of orders that have been placed.

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part number and helps processin" by a process which EexplodesC end item requirements

into component requirements.

hus O* identifies how each end product is manufactured, specifyin" all

subcomponents items, their sequence of build up, their quantity in each finished unit and

the wor+ centres performin" the build up sequence. his information is obtained fromproduct desi"n documents, wor+ flow analysis and other standard manufacturin"

information.

he O* processor is a software pac+a"e that maintains and updates the O* listin" of

all components that "o into the product. !t also lin+s the O* file with the inventory

status file so that the requirements explosion correctly accounts for the current inventory

levels of all components.


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IN$ENTO(* +N+0EENT!n ma'ority of the or"aniDations, the cost of material forms a substantial part of the sellin"

price of the product. he interval between the receivin" the purchased parts and

transformin" them in to final products varies from industries to industries dependin"upon the cycle time of manufacture. *aterials are procured and held in the form of

inventories. !t is therefore necessary to hold inventories of various +inds to act as a buffer

between supply and demand for efficient operation of the system. hus, an effective

control on inventory becomes a must for smooth and efficient runnin" of the productioncycle with least interruptions. he stoc+in" of anythin" that is tan"ible in order to meet

the future demand is the sub'ect8matter of inventory theory.

E+NIN0 O& IN$ENTO(*

!nventory "enerally refers to the materials in stoc+. !t is also called the idle resource of anenterprise. !nventories represent those items, which are either stoc+ed for sale or they are

in the process of manufacturin" or they are in the form of materials, which are yet to be

utilised.

T*PE' O& IN$ENTO(IE'

& manufacturin" firm "enerally carries the followin" types of inventories:

1. (aw materials3

2aw materials are those basic unfabricated materials which have not under"one any

operation since they are received from the suppliers, e."., round bars, an"les, channels,

pipes, etc.

4. >ought out parts3

hese parts refer to those finished parts, subassemblies which are purchased from outside

as per the companyFs specifications.

5. Aor2=in=process inventories -AIP3

hese refer to the items or materials in partially completed condition of manufacturin",

e."., semi8finished products at the various sta"es of manufacture. .

6. &inished goods inventories3

hese refer to the completed products ready for dispatch.


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7. aintenance, repair and operating stores3

ormally these inventories refer to those items, which do not form the part of the finalproduct but are consumed in the production process, e."., machine spares, oil, "rease.

8. Tools inventory3

!ncludes both standard tools and special tools.

9. iscellaneous inventories3

*iscellaneous inventories A office stationeries and other consumable stores.

!nventories can also be classified as: (i) 3luctuation inventories, (ii) &nticipation

inventories, (iii) #ot siDe inventories, and (iv) ransportation inventories.

&luctuation inventorieshave to be carried for the reason that sales and production timesfor the product cannot be always predicted with accuracy. here are variations in demand

and lead times required to manufacture items. hus, there is a need for reserve stoc+ orsafety stoc+ to account for the fluctuations in demand and lead time.

+nticipation inventories are built up in advance for bi" sellin" season, promotionpro"ramme or anticipation of li+ely chan"e in demand suddenly and in case of plant

shutdown period. !t is the inventory for the future need.

/ot si@e inventory refers to producin" and storin" at the rate hi"her than the currentconsumption rate. he production in lots is "oin" to help the advanta"e of price discounts

for quantities purchased in bul+ and fewer set8ups and, hence, the lower set8up cost.

The transportation inventoriesexist because materials must be moved from one place

to another. hen transportation requires a lon" time, the items in transport represent the

inventory. hus, transportation inventory is a result of extended or lon"er transportationtime.

(E+'ON' &O( BEEPIN0 IN$ENTO(IE'

1. To sta!ilise production3

he demand for an item fluctuates because of the number of factors, e."., seasonality,production schedule etc. he inventories (raw materials and components) should be made

available to the production as per the demand failin" which results in stoc+ out and the

production stoppa"e ta+es place for want of materials. 0ence, the inventory is +ept tota+e care of this fluctuation so that the production is smooth.

4. To ta2e advantage of price discounts3


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/sually the manufacturers offer discount for bul+ buyin" and to "ain this price advanta"e

the materials are bou"ht in bul+ even thou"h it is not required immediately. hus,

inventory is maintained to "ain economy in purchasin".

5. To meet the demand during the replenishment period3

he lead time for procurement of materials depends upon many factors li+e location of

the source, demand supply condition, etc. -o inventory is maintained to meet the demand

durin" the procurement (replenishment) period.

6. To prevent loss of orders -sales3

!n this competitive scenario, one has to meet the delivery schedules at 4BB per centservice level, means they cannot afford to miss the delivery schedule which may result in

loss of sales. o avoid this the or"anisations have to maintain inventory.

7. To 2eep pace with changing mar2et conditions3

he or"anisations have to anticipate the chan"in" mar+et sentiments and they have tostoc+ materials in anticipation of non8availability of materials or sudden increase in

prices.

O>?ECTI$E' O& IN$ENTO(* CONT(O/

4. o ensure adequate supply of products to customer and avoid shorta"es as far as

possible.

5. o ma+e sure that the financial investment in inventories is minimum (i.e., to see

that the wor+in" capital is bloc+ed to .the minimum possible extent).

6. %fficient purchasin", storin", consumption and accountin" for materials is an

important ob'ective. .

7. o maintain timely record of inventories of all the items and to maintain the stoc+

within the desired limits.

9. o ensure timely action for replenishment.

G. o provide a reserve stoc+ for variations in lead times of delivery of materials.

H. o provide a scientific base for both short8term and lon"8term plannin" of

materials.

>ENE&IT' O& IN$ENTO(* CONT(O/


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!t is an established fact that throu"h the practice of scientific inventory control, the stoc+s

can be reduced anywhere between 4B per cent to 7B per cent. he benefits of inventory

control are:

4. !mprovement in customers relationship because of the timely delivery of "oods

and services.

5. -mooth and uninterrupted production and, hence, no stoc+ out.

6. %fficient utilisation of wor+in" capital.

7. 0elps in minimisin" loss due to deterioration, obsolescence dama"e and

prelifera"e.

9. %conomy in purchasin".

G. %liminates the possibility of duplicate orderin".

CO'T' +''OCI.+TE% AIT IN$ENTO(*

1. Purchase -or production cost3

he value of an item is its unit purchasin" (production) cost. his cost becomes

si"nificant when availin" the price discounts. his cost is expressed as 2s.unit.

4. Capital cost3

he amount invested in an item, (capital cost) is an amount of capital not available for

other purchases. !f the money were invested somewhere else, a return on the investmentis expected. & char"e to inventory expenses is made to account for this unreceived return.

he amount of the char"e reflects the percenta"e return expected from other investment.

5. Ordering cost3

!t is also +nown by the name procurement cost or replenishment cost or acquisition cost.

$ost of orderin" is the amount of money expended to "et an item into inventory. hista+es into account all the costs incurred from callin" the quotations to the point which the

items are ta+en to stoc+.

here are two types of costs83ixed costs and variable costs.

3ixed costs do not depend on the number of orders whereas variable costs chan"e withrespect to the number of orders placed. he salaries and wa"es of permanent employees

involved in purchase function and control of inventory, purchasin", incomin" inspection,

accountin" for purchase orders constitute the ma'or part of the fixed costs. he cost of


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placin" an order varies from one or"anisation to another. hey are "enerally classified

under the followin" heads:

-i Purchasing3

he clerical and administrative cost associated with the purchasin", the cost ofrequisitionin" material, placin" the order, follow8up, receivin" and evaluatin" Iuotations.

-ii Inspection3

he cost of chec+in" material after they are received by the supplier for quantity and

quality and maintainin" records of the receipts.

-iii +ccounting3

he cost of chec+in" supply a"ainst each order, ma+in" payments and maintainin"

records of purchases.

-iv Transportation costs.

6. Inventory carrying costs -holding costs3

hese are the costs associated with holdin" a "iven level of inventory on hand and this

cost vary in direct proportion to the amount of holdin" and period of holdin" the stoc+ in

stores. he holdin" costs include.

(i) -tora"e costs (rent, heatin", li"htin", etc.).

(ii) 0andlin" costs: $osts associated with movin" the items such as cost of labour,equipment for handlin".

(iii)


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(iii) #oss of customer "oodwill.

(iv) %xtra cost associated with ur"ent, small quantity orderin" costs.

(v) #oss of profit contribution by lost sales revenue.

he unsatisfied demand can be satisfied at a later sta"e (by means of bac+ orders) orunfulfilled demand is lost completely (no bac+ orderin", the shorta"e costs become

proportional to only the shorta"e quantity).

IN$ENTO(* CONT(O/ D TE(INO/O0*

4. %emand3 !t is the number of items (products) required per unit of time. he

demand may be either deterministic or probabilistic in nature.

5. Order cycle3he time period between two successive orders is called order

cycle.

6. /ead time3he len"th of time between placin" an order and receipt of items is

called lead time.

7. 'afety stoc23!t is also called buffer stoc+ or minimum stoc+. !t is the stoc+ or

inventory needed to account for delays in materials supply and to account forsudden increase in demand due to rush orders.

9. Inventory turnover3 !f the company maintains inventories equal to 6 months

consumption. !t means that inventory turnover is 7 times a year, i.e., the entireinventory is used up and replaced 7 times a year.

49. (e=order level -(O/3 !t is the point at which the replenishment action isinitiated. hen the stoc+ level reaches 2.O.#., the older is placed for the item.

4G. (e=order "uantity3his is the quantity of material (items) to be ordered at there8order ! level. ormally this quantity equals the economic order quantity.

IN$ENTO(* CO'T (E/+TION'IP'

here are two ma'or costs associated with inventory. Procurement cost (orderin" cost)

and inventory carryin" cost. &nnual procurement cost varies with the number of orders.

his implies that the procurement cost will be hi"h, if the item is procured frequently insmall lots. he procurement cost is expressed as 2s.Order.

he annual inventory carryin" cost (Product of avera"e inventory x $arryin" cost) isdirectly proportional to the quantity in stoc+. he inventory carryin" cost decreases, if the

quantity ordered per order is small. he two costs are diametrically opposite to each

other. he ri"ht quantity to be ordered is one that stri+es a balance between the two

opposin" costs. his quantity is referred to as ?%conomic Order Iuantity@ (%OI).


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IN$ENTO(* O%E/'

One of the basic problem of inventory mana"ement is to find out the order quantity so

that it is most economical from overall operational point of view. 0ere the problem lies inminimisin" the two conflictin" costs, i.e., orderin" cost and inventory carryin" cost.

!nventory models helps to find out the order quantity, which minimises the total costs

(sum of orderin" costs and inventory carryin" costs). !nventory models are classified asshown in 3i". 55.5.

Inventory odels.

O%E/ = I. ECONOIC O(%E( )+NTIT* AIT IN'T+NT+NEO)'

'TOCB (EP/ENI'ENT ->+'IC IN$ENTO(* O%E/

+ssumptions

4.


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= umber of orders placed per annum

c = otal cost per annum

O%E/=II. ECONOIC O(%E( )+NTIT* AEN 'TOCB

(EP/ENI'ENT I' NON=IN'T+NT+NEO)' -P(O%)CTION

O%E/

his model is applicable when inventory continuously builds up over a period of time

after placin" an order or when the units are manufactured and used (or sold) at a constantrate. ecause this model is specially suitable for the manufacturin" environment where

there is a simultaneous production and consumption, it is called Production odel#.

+ssumptions

4. he item is sold or consumed at the constant demand rate which is +nown.

5. -et up cost is fixed and it does not chan"e with lot siDe.6. he increase in inventory is not instantaneous but it is "radual.

O%E/=III3 + IN$ENTO(* O%E/ AEN 'O(T+0E' +(E PE(ITTE%

!n many practical situations, shorta"es or stoc+ outs are not permitted. -o, it is must thatstoc+ out situations are to be avoided. here are occasions where stoc+ out are

economically 'ustifiable.

his situation is observed normally when cost per unit is very hi"h.

$s= -horta"e $ost (-toc+ out cost) per unit per period.

- = alance units after bac+ orders are satisfied. .

I A - = umber of shorta"es per order.

t4= ime period durin" which inventory is positive.

t5= ime durin" which shorta"e exists.

= ime between the receipt of orders.

he basic assumption is that there is no loss of sales due to stoc+ out or shorta"es.

he economic order quantity is expressed as follows:

O%E/=I$3 IN$ENTO(* O%E/ AIT P(ICE %I'CO)NT'

hen items are bou"ht in lar"e quantities, the supplier often "ives discounts. 0owever, if

the material is purchased to ta+e advanta"e of discount, the avera"e inventory level andso the inventory carryin" costs will increase.


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enefits for the purchaser from lar"e orders are, lower cost per unit, lower shippin" and

transportation cost, reduced handlin" cost and reduction in orderin" costs due to lessnumber of orders.

hese benefits are to be compared with the increase in carryin" costs. &s the order siDeincreases, more space should be provided to stoc+ the items.

& decision is, therefore, to be ta+en whether the buyer should stic+ to economic orderquantity or increase the same to ta+e advanta"e that, at lar"e quantities, the production

costs per piece are lower (economics of scale) and, hence, part of the savin"s can be

passed on to the customer.

Price=discount odel

#et < be the annual consumption. (


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OPE(+TION' 'T(+TE0*

Productivity improvement is an imperative in operation strate"y for all firms. !n order to

remain competitive, a firm must continually see+ ways of continually reducin" costs and

must see+ new ways of improvin" the operations. 3or firms operatin" in "lobal mar+ets,productivity improvement needs to become a mana"erial reli"ion. Productivity

improvement "et implemented throu"h productionoperations strate"y.

%efinition of Operation 'trategy

Operation -trate"y is concerned with settin" broad policies and plans for usin" the

resources of the firm to support in a best possible way firms lon"8term competitivestrate"y.

-chroeder, &nderson and $leveland (4KLG) have defined operations strate"y as consistin"

of four components A mission, distinctive competence ob'ectives and policies. hese fourcomponents help define what "oals operations should accomplish and how it should

achieve these "oals.

he resultin" strate"y should "uide decision8ma+in" in all phases of manufacturin".

hus, Operations strate"y is a vision for the operations functions that sets an overall

directions or thrust for decision ma+in".

OPE(+TION' P(IO(ITIE'

&ccordin" to s+inner of 0arward usiness -chool and 0ill erry of #ondon usiness

-chool a few basic operations priorities are determined. he priorities include 8

1. Cost

%very industry has a price sensitive se"ment, which ma+es the buyin" decision on the

basis of low cost. o successfully compete in this se"ment, a firm must be a low cost

producer. he products strictly sold on the basis of cost are typically A low valued

commodity in nature, i.e., it is difficult to distin"uish products of one producer fromanother. $ompetition is fierce in this se"ment and the low cost producer will determine

the price of the product.

4. uality

Iuality refers to both the product quality and process quality. he level of quality offeredin the products desi"n will vary with the mar+et se"ment to which the product is offered.

he ob'ective of establishin" the proper level of product quality is to focus on the

requirements of the customer. -o, level of quality is a balanced with the cost, which is a

compromise.


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Process quality is critical as it relates directly to the reliability of the product. he "oal of

process quality is error free production of products. 2eliability and quality are built in tothe product durin" desi"n and subsequently durin" manufacturin" phase.

5. %elivery

he speed of delivery i.e. the companyCs ability to deliver "oods and services more

quic+ly than its competitors is critical for some products and services i.e. specially forrepairs. &lso alon" with the delivery speed, delivery reliability i.e. the ability of the firm

to supply the product or service on or before the scheduled delivery due date is also

critical.


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he second strate"y is called product innovation and new product introduction strate"y.

his strate"y would typically be used in an emer"in" and possibly in "rowin" mar+et

where the advanta"e is "ained by brin"in" out superior products within a short span.Price is not the dominant factor for competition. !n this case, operations would emphasiDe

flexibility to introduce new products as a dominant ob'ective in its mission. Operations

policies include the product teams, flexible automation to be adapted to new productswor+ force with flexible s+ills, outsourcin" some +ey services and parts to retain

flexibility. Napanese strate"y believed and is successful in usin" imitator strate"y.

he company after decidin" the mission, ob'ectives and the tar"et mar+et se"ment in

which the company will compete, the company has to choose between the fundamental

strate"ic competitive options li+e

(i)


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Cost /eadership 'trategy

he overall cost leadership aims to produce and deliver the product or service with

specified quality, at a lower cost relative to the competitors. he firm practicin" this

strate"y will be distin"uished as a lowest cost producer and seller. he lowest cost shouldbe achieved throu"h cost reduction.

&ocus 'trategy

Or"anisations usin" focus strate"y aim to concentrate on a particular "roup of customers

(nicthe mar+et), "eo"raphical mar+et or product lines in order to serve a well defined but

narrow mar+et better than its competitors.

Industrial Engineering & Production Management

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