Material Productivity By T. A. Khan

January 2008

RM ProductivityRaw materials productivityOutput (value or unit or value added)Value of Raw material used How to Increase?=Efforts to reduce the cost of input materials.

Material productivity Reduce scrap or waste so that a higher percentage of the raw materials is utilised.Use of non corrosive materials or coatings to increase product life. (e.g. Bridges, highways & tools etc.)Reduce inventories to get higher returns per unit of inventory item.

Cost of Input MaterialsReduce the actual quantity of materials used per unit of the finished product.Improve product design.Improve manufacturing processes to:Enhance product qualityReduce material waste.Improve Suppliers processesReduce inventory costs.

What is Inventory?Stock of materialsStored capacityExamples

The Functions of InventoryTo provide a stock of goods that will provide a selection for customersTo take advantage of quantity discountsTo hedge against inflation and upward price changes.Protect against shortagesWIP decouples production stages

The Functions of InventoryIndependence of operationsDecouple production & distributionpermits constant production quantitiesVariation in demandFlexibility in schedulingSupply (lead-time) variabilityEconomic purchase order size

Disadvantages of InventoryHigher costsItem cost (cost of the item)Ordering (or setup) costcost of forms, clerks wages, EDI systemHolding (or carrying) costBuilding lease, insurance, money tied upDifficult to controlHides production problems

Types of InventoryRaw materialWork-in-progressMaintenance/repair/operating supplyFinished goodsDefectivesReturns

Performance and WIP LevelLess WIP means products go through system fasterreducing the WIP makes you more sensitive to problems, helps you find problems fasterStream and Rocks analogy:Inventory (WIP) is like water in a streamIt hides the rocksRocks force you to keep a lot of water (WIP) in the stream

Lowering Inventory Reduces WasteWIP hides problems

Lowering Inventory Reduces WasteWIP hides problems

Lowering Inventory Reduces WasteReducing WIP makesproblem very visible

Lowering Inventory Reduces WasteRemove problem, runWith less WIP

Lowering Inventory Reduces WasteReduce WIP again to findnew problems

The Material Flow Cycle

The Material Flow CycleRun time: Job is at machine and being worked onSetup time: Job is at the work station, and the work station is being "setup."Queue time: Job is where it should be, but is not being processed because other work precedes it.Move time: The time a job spends in transitWait time: When one process is finished, but the job is waiting to be moved to the next work area.Other: "Just-in-case" inventory.

Inventory CostsHolding costs - associated with holding or carrying inventory over timeOrdering costs - associated with costs of placing order and receiving goodsSetup costs - cost to prepare a machine or process for manufacturing an order

Holding (Carrying) CostsObsolescenceInsuranceExtra staffingInterestPilferageDamageWarehousingEtc.

Inventory Holding CostsCategory% of ValueHousing (building) cost6%Material handling3%Labor cost3%Opportunity/investment11%Pilferage/scrap/obsolescence3%Total Holding Cost26%

Shrinkage CostsHow much is stolen?2% for discount, dept. stores, hardware, convenience, sporting goods3% for toys & hobbies1.5% for all elseWhere does the missing stuff go?Employees: 44.5%Shoplifters: 32.7%Administrative / paperwork error: 17.5%Vendor fraud: 5.1%

ABC AnalysisDivides on-hand inventory into 3 classesA class, B class, C classBasis is usually annual $ volume$ volume = Annual demand x Unit costPolicies based on ABC analysisDevelop class A suppliers moreGive tighter physical control of A itemsForecast A items more carefully

Classifying Items as ABCABC% Annual $ Usage% of Inventory Items

Class

% $ Vol

% Items

A

80

15

B

15

30

C

5

55

Ordering CostsSuppliesFormsOrder processingClerical supportEtc.

Setup CostsClean-up costsRe-tooling costsAdjustment costsEtc

Inventory ModelsFixed order-quantity modelsEconomic order quantityProduction order quantityQuantity discountProbabilistic modelsFixed order-period models

EOQ AssumptionsKnown and constant demandKnown and constant lead timeInstantaneous receipt of materialNo quantity discountsOnly order (setup) cost and holding costNo stockouts

Inventory Usage Over Time

EOQ ModelHow Much to Order?

EOQ Model Equations

Material productivityRaw materials productivityOutput (value or unit or value added)Value of Raw material used =Value of Raw Material used.Value of Perfect RequirementValue of wasteImprove Product DesignInventory CostsImprove Manufacturing ProcessImprove Material QualityOptimize Inventory carrying Costs Optimize Inventory Ordering Costs

ABC Classification SolutionStock #Vol.Cost$ Vol.%ABC20626,000$ 36$936,000105200600120,0000192,00055110,00014420,000480,0002077,0001070,000Total1,316,000

ABC Classification Solution

Stock #

Vol.

Cost

$ Vol.

%

ABC

206

26,000

$ 36

$936,000

71.1

A

105

200

600

120,000

9.1

A

019

2,000

55

110,000

8.4

B

144

20,000

4

80,000

6.1

B

207

7,000

10

70,000

5.3

C

Total

1,316,000

100.0

Deriving an EOQDevelop an expression for setup or ordering costsDevelop an expression for holding costSet setup cost equal to holding costSolve the resulting equation for the best order quantity

Why Holding Costs IncreasePurchase OrderDescriptionQty.Microwave1Order quantityMore units must be stored if more are ordered

Why Order Costs Decrease

EOQ Model (When To Order)

The Reorder Point (ROP) Curve

Sample Problem 1Assume you have a product with the following parameters:Annual Demand = 360 unitsHolding cost = $1.00 per unitOrder cost = $100 per orderWhat is the EOQ for this product? Assuming a 300-day work year, how many orders should be processed per year? What is the expected time between orders?

Problem 2 Solution