ppc material

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PRODUCTION PLANNING AND CONTROL

UNIT-I:

SYLLABUS: Introduction:-Objectives of production planning and control, definitions, functions

of production planning and control, organization of production planning and control department,

internal organization of department. Forecasting: Forecasting models, Aggregate production planning, master production scheduling, materials requirements planning.

Requirement of PPC system:

1. Sound organisation structure with mechanism for proper delegation of authority and

fixation of responsibilities at all levels.

2. Information feedback system should provide reliable and up-to-date information to all the

persons carrying production planning and control functions.

3.

Standardization of materials, tools, equipment, workmen etc.

4. Trained personal for using special tools or equipment and manufacturing process.

5.

Flexibility to accommodate changes and bottlenecks and storage of material, power failure,machine breakdown and absenteeism of employees.

6. Appropriate management policies for production levels and inventory levels.

7. Accurate assessment of manufacturing lead time and procurement lead time.

8. Planning capacity should be adequate to meet the demand.

Principle of PPC:

The highest efficiency in production is obtained by manufacturing the required quantity and

required quality of a product at required time by the best and the cheapest method.

PPC is a tool to coordinate all the manufacturing activities in a predefined system. PPC essentially

consists of planning the production in a manufacturing organization before the actual productactivities start and exercising control activities to ensure that planned production is released in

terms of quality, quantity, delivery schedule and cost of production.

Production planning involves in the following activities of a manufacturing system to produce a

product:

1. Designing a product.

2. Determining equipment and capacity requirements.

3. Designing the layout of physical facilities.

4. Designing material handling system.

5.

Designing sequence of operations.


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Objectives of PPC:

1. To deliver quality goods in required quantities.

2.

To ensure maximum utilization of resources.

3. To maintain optimum inventory levels.

4. To maintain flexibility in manufacturing operations.

5.

To coordinate between the labour and the machines.

6. To ensure the effective cost reduction and cost control.

7. To prepare production schedule.

8. To remove bottlenecks in production.

Various phases in PPC function:

2. Action Phase.

3. Control Phase.

1) Planning phase:

a) Pre-planning: Pre-planning activities involve product planning and development, resource

planning and plant layout planning.

b) Active planning: It involves planning for quality.

2) Action Phase: It is the execution or implementation phase.

3) Control Phase: It includes status reporting, material control, equipment control, and quality

control.

Functions of PPC:

1) Estimating 1) Dispatching

2) Routing 2) Inspection

3) Scheduling 3) Evaluating

4) Loading 4) Expediting

1. Planning PhasePre planning.

Active planning.

PPC

Production Planning Production control


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Production Planning:

The main functions of Production Planning are:

1. Estimation: It decides the quantity of products to be produced and the cost involved on the

basis of sales forecast.

2.

Routing: This is the process of determining the operation to be performed in the production process.

3. Scheduling: It involves fixing the priorities for each job and determining the start and finish

time.

4. Loading: It involves deciding on which job is to be assigned to which work centre.

Production Control:

The main functions of Production control are:

1) Dispatching: It involves

i) Setting of production activities in motion.

ii)

Providing movement to the raw materials.

iii) Issuing of job.

iv) Issuing of drawings, process sheets, job law sheet to the machine and assembly shops.

2) Evaluating: It involves checking of production with the planned schedule.

3) Inspection: It involves checking of production with the planned schedule.

4) Expediting: It ensures that the work is carried out as per the delivery schedule are met.

Organisation of production planning and control system:

There is no single pattern for the organization of a PPC activity. It depends on size of organization,

type of production system, and the type of product. There are two types of PPC system.

1) Decentralized PPC: In many small plants, the production planning functions such as routing,

loading, scheduling, will be included in the duties of the shop floor manager super intendment,

foremen, etc. But it is difficult to compete day to day work adequate planning and as a result,

it is often move feasible to break the PPC functions and assign them to qualified special. The

groups should be organized as staff section, normal reporting to the top manufacturing

executive.

2) Centralized PPC: Centralization of PPC staff depends upon the design of the PPC system. It a

completely centralized setup determination of shipping delivery, analysis of sales, stock,

preparation of routes, load charts, and scheduling charts and dispatching of work to the shop

floor, completes with the job tickets, and all the other necessary paper work would be

accomplished by the central PPC unit. In addition as the work is completed, a careful analysis

of actual performance could be made is completed and if corrective action actions were

required, it could be initiated by staff group.

Relationship with other manufacturing function:

Good relationships with the other function in the enterprise are essential for the effective

functioning of PPC.


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Good relationship with the marketing group is necessary particularly in the new of the

importance of market conditions and the good will of customers.

Both product engineering and process engineering must help repeatedly informed as to

their plans to avoid the manufacturing of goods either by incorrect specification or by

improper method.

Internal organization of department :

It normally follows the functional pattern to describe the function of ppc.

Department is headed by the senior production engineer who is responsible for all

planning and control task connected with production and proper co-ordination of various

functions in order to ensure that the shops are provided with all the available instructions

and facilities.

FORECASTING:

A forecast is an estimate of an event which will happen in the future. The event may be a product,

rainfall, population of a country. The forecast value is not deterministic quantity. In an industryforecasting is the first level division making activity. Forecasting provides a band for coordination

of plans for activities on various manufacturing activities in a company.

Forecasting Modules:

The forecasting techniques can be classified as qualitative and quantitative techniques.

Qualitative forecasting techniques: This technique uses subjective approach is useful where

no data is available and for new product.

1) Delphi Method.

2) Market surveys.

Quantitative forecasting techniques: these are based on historic data. These are more

accurate and computer can be used to speed up the process.

i. Simple moving average method.

ii. Single exponential smoothing method.

iii. Double exponential smoothing method.

iv. Simple regression method.

SINGLE EXPONENTIAL SMOOTHING: This method keeps a running average of demand

and adjusts it for each period in proportion to the difference between the latest actual demand and

the latest value of average forecast.

Ft = Ft-1 +α (Dt-1 – Ft-1)

Where Ft = smooth average forecast for period‘t’.

Ft-1= previous period forecast.

α = smoothing constant (0 < α


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Problem: Using the exponential smoothing technique, compute the forecast from the following

data and two situations when α= 0.3 and α=0.7. Compute forecast for the periods assuming initial

forecast for the period 1to 27. Which forecast do you accept, and give reasons?

Sol:

Period Demand Old forecast

(Ft-1)

Forecast error

(Dt-1 – Ft-1)

Correction

α (Dt-1 – Ft-1)

New forecast

Ft-1 +α (Dt-1 – Ft-1)

α=0.3 α=0.7 α=0.3 α=0.7 α=0.3 α=0.7 α=0.3 α=0.7

1 27 27 27

2 30 27 27 3 3 0.9 2.1 27.9 29.1

3 32 27.9 29.1 4.1 2.9 1.23 2.03 29.13 31.13

4 31 29.13 31.13 1.87 -0.13 0.561 -0.091 29.691 31.030

5 28 29.631 31.039 -1.691 -3.039 -0.507 -2.127 29.1837 28.911

6 27 29.1837 28.911 -2.183 -1.911 -0.655 -1.331 28.52859 27.573

7 30 28.529 27.573 1.471 2.427 0.4413 1.6989 28.970 29.272

8 33 28.970 29.272 4.030 3.728 1.2090 2.6096 30.179 31.882

9 33 30.179 31.882 2.821 1.118 0.8463 0.7826 31.025 31.094

10 31 31.025 31.099 -0.025 -0.099 -0.007 -0.069 31.017 31.030

The new forecast for α=0.7 is closer to demand than of α=0.3.

Therefore forecast 2 is accepted.

Problem: A firm was simple exponential smoothing with α=0.2 to forecast the demand forecast

for the first week of January was 400 units whereas the actual demand found out to be 450 units.Find

a) Forecast the demand for second week of January.

b) Assume the actual demand for second week turned out to be 460 units, forecast the demand

up to third week of February assuming the subsequent demands as 465,434,420,498 and

462 units?

Period 1 2 3 4 5 6 7 8 9 10

Demand 27 30 32 31 28 27 30 33 33 31


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Sol:

a) Forecast demand =400+0.2(450-400) =410 units

PLANNING:

There are three types of production planning horizons.

1. Long term planning (5 to 10 yrs.)

Business forecasting.

Product and market planning.

Capacity planning.

Location and layout planning.

Financial planning.

2. Medium term planning. (6 months to 2 yrs.)

Aggregate and production planning.

Product forecasting.

Master production scheduling.

Period Demand (Ft-1) (Dt-1 – Ft-1) α (Dt-1 – Ft-1) Ft-1 +α (Dt-1 – Ft-1)

1st week of Jan 450 400 50 10 410

2nd week of Jan 460 410 50 10 420

3rd week of Jan 465 420 45 9 429

4th week of Jan 434 429 5 1 430

1st week of feb 420 430 -10 -2 428

2nd week of feb 498 428 70 -14 442

3rd week of feb 462 442 20 4 446


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3. Short term planning (2 to 6 months)

Materials and purchasing control.

Scheduling.

Machine loading.

Job assignments.

Aggregate production planning: In APP, the objective is to develop plan that will satisfy or meet

the demands within the limits of available resources and at the least cost of the organization it

includes optimal combination of production rate, work force and investor’s level.

Strategies for aggregate production planning: One can use any one or a combination of following

strategy for smoothening the functions in demand.

Strategy 1: Building and utilizing inventory to constant work force.

Strategy 2: varying the size of work force.

Strategy 3: overtime utilisation.

Strategy 4: sub-contracting.

If a single strategy is used to meet the demands then it is called a pure strategy. If the

combinations of the above pure strategies are used to meet the demands then it is called a mixed

strategy. Several mixed strategies can be generated by taking the situation of two at a time or three

at a time of a pure strategy. The objective of aggregate planning is to generate such meaningful set

of pure or mixed strategies evaluate these select the most economical alternatives for

implementation.

Aggregate Planning Methods:

The various methods used to solve aggregate planning problems are classified as follows:

1) Graphical Method. 2) Heuristic method 3) Simulation.

1. Graphical method: In this method, cumulative demand values and cumulative production

capabilities are plotted and the same graph which would help us to identify the gap between

demand and the production capacity in different periods.

http://3.short/http://3.short/


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Problem: An industry has developed for a group of items that has the following demand

pattern.

Quarter Demand Cumulative demand

1 270 270

2 220 490

3 470 960

4 670 1630

5 450 2080

6 270 2350

7 200 2550

8 370 2920

a) Plot the demand as a histogram. Determine the production rate to meet the average demand

and plot the average demand forecast on the graph (production rate).

b) Plot the actual cumulative forecast requirement over the time and compare them with the

average forecast requirements. Indicate the excess inventory and back order on the graph.


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A

B


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The graph for the actual cumulative forecast requirement is shown in the figure above. In the same

figure it is compared with cumulative production unit based on the average production rate which

is equal to the demand. At any point, if actual cumulative forecast is more than cumulative

production units then there will be a shortage of items volume may be filled through back ordering

at a later date. Otherwise there will be excess stock which will be absorbed by the future demand.

2. Heuristic method:

In this method, a set of pure strategies and mixed strategies are generated and evaluated in terms

of cost. And finally either a pure strategy or a mixed strategy with minimum total cost is selected

for implementation. This concept is demonstrated by the following example.

Qmarket Demand Cumulative demand

1 270 270

2 220 490

3 470 960

4 670 1630

5 450 2080

6 270 2350

7 200 2550

8 370 2920

a) Suppose that the firm estimates that it costs Rs. 150 per unit to increase the product rates

Rs. 200 per unit to decrease the product rate, Rs. 50 per unit per quarter to carry the item

on inventory and Rs. 150 per unit of sub-contracted. Compare the cost incurred if pure

strategies are followed.

b) Given these costs, evaluate the following mixed strategy if company decides to maintain a

constant product of 250 units per quarter and permits 20% overtime when the demand

exceeds the production rate. The increment of overtime Rs. 25 per unit. It plans to meet the

excess demand by hiring and firing of words.


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Strategy 2: Changing inventory levels:

In this pure strategy, the company calculates the average demand and sets its production capacity

to this average demand. This may result in excess of units in a particular period and shortage of

units on other periods. The excess units will be available in inventory for the future use. The

shortage of units can be fulfilled using the future inventory units. The adjustment of the inventories

and the cost of carrying the inventories are shown in the following table and the total cost of the

plan are calculated.

Quarter Demand

forecast

Cost of

increase in

production on

level (Rs.)

Cost of

decrease in

production on

level (Rs.)

Total plan cost

1 270 - - -

2 220 - 10000 10000

3 470 37500 - 37500

4 670 30000 - 30000

5 450 - 44000 44000

6 270 - 36000 36000

7 200 - 14000 14000

8 370 25500 - 25500

197000


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Quarter Demand

forecast

Cumulative

demand

Average

production

level

Cumulative

production

level

Inventory Adjusted

inventory

1 270 270 365 365 95 350

2 220 490 365 730 240 495

3 470 960 365 1095 135 390

4 670 1630 365 1460 -170 85

5 450 2080 365 1825 -255 0

6 270 2350 365 2190 -160 95

7 200 2550 365 2555 5 260

8 370 2920 365 2920 0 255

Strategy 3: Sub-contracting:

Some firms may be interested in acting up their regular type capacity to its minimum value and

meet the rest of the demand using sub-contracting. The cost of this plan is compares as follows:

Quarter Demand

forecast

Production units Sub-contracting

units

Cost of sub-

contracting

1 270 200 70 7000

2 220 200 20 2000

3 470 200 270 27000

4 670 200 470 47000

5 450 200 250 25000

6 270 200 70 7000

7 200 200 0 0

8 370 200 170 17000132000

For this parts production, the ideal pure strategy would be strategy 2 i.e., changing

inventory.

1. Generating pure strategies


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2. Various pure strategies are given belowa. Vary the work force size b. Changing inventory levelsc. Sub-contracting

The method of computing cost in each of the above is demonstrated here:

Strategy 1: Varying the workforce size:

In this pure strategy, the size of workforce will be varied to meet the actual demand. This meansthat during the period of low demand, the company must fire employees and at the time of highdemand, the company will have to hire employees.

These two extreme steps involve associated costs. As per this pure strategy,the produced units will be equal to demand values in each period.

3.

The mixed strategy has the following components

i.

Maintain constant production rate of 250 units/ quarter.ii. Permit 20% overtime when demand exceeds production rate. The incremental cost of

overtime is Rs. 25/ unit.iii. To meet any further demand, it chooses to hire and fire workers.

This mixed strategy is computed in the following table:

Quarter Units

of

demand

forecast

Regular

time

production

units

Additional

units

needed

after

regular

time

Overtime

production

Additional

units after

overtime

period

Cost of

inventory

Cost of

inventory

Cost of

changing

workforce

Tota

cost

1 270 250 20 50 -30 1500 0 1250 2750

2 220 250 -30 0 -30 (-60) 3000 0 0 3000

3 470 250 220 50 170 (10) 0 16500 1250 1700

4 670 250 420 50 370 0 39000 1250 4025

5 450 250 250 50 150 0 44000 1250 4525

6 270 250 20 50 -30 1500 30000 1250 3270

7 200 250 -50 0 -50 (-80) 4000 0 0 400

8 370 250 120 50 70 (-10) 500 0 1250 1700

14750


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Master Production Schedule (MPS):

A master production schedule represents a plan for manufacturing. It is an anticipated builtschedule for manufacturing end production. It develops the quantities and dates to be exploited forgeneral per period requirement for sub-assemblies, parts and raw material.

It is a statement of product and not a statement of market demand. It is a feasiblemanufacturing plan. It takes into account capacity limitations as well as desires full utilization ofcapacity. It contains all products for which bill of materials exists.

1. MPS is a manufacturing planning tool that takes business inputs such as customer demand,capacity, inventory levels and planned material deliveries.

2. MPS is a tool typically controlled by sales and operational planning functions andadministered by master planning schedules.

Benefits of MPS:

1. MPS discounts customer demand from manufacturing while customer demand is used as planned variable.

2. MPS derives the manufacturing team and customer demand is determined frommanufacturing process.

3. MPS smoothes the demand. Most customer demand is spooky with peaks and troughs. Itcan cause planning problems for manufacturing. A benefit of MPS is that it decomposesthe customer demand and optimises the production losses.

4. It protects lead time. Customer demand disconnected from manufacturing, themanufacturing is scheduled from demand loaded within lead time and manufacturing just

works to MPS plan.

5.

It helps the sales team to predict when to promise the customers. MPS plan can support thesales team by helping them at what time the end product is available to promise thecustomers.

6. MPS acts as a single communication tool.

Customer demand

MPS

Manufacturing


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Problem: The following table the forecast for each of the next four weeks at 70 units. The startinginventory is zero. The MPS rule is that whenever the projected inventory on hand is negative youneed to schedule production. The production lot size is 150 units. The following table showscustomer order as given below:

Week 1 2 3 4

Order 80 50 30 10

Solution:

Week Order Forecast

1 80 70

2 50 70

3 30 70

4 10 70


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Material Requirement Planning (MRP):

In MRP system, we are dealing with dependent or humpy demand. This humpydemand is directly related to demand of some other products (components, sub-assemblies, rawmaterials). Of manufacturing inventories.

Lead time:

In MRP, lead time are used to determine the starting date for assembling final products,starting date for sub-assemblies for producing component parts and for initiation of orders of rawmaterials.

Inputs to MRP system:

1. MPS 2. Bill of materials 3. Inventory record file

Week 1 2 3 4

Forecast 70 70 70 70

Firm Order 80 50 30 10

Start inventory 0 20 50 80

Requirement 80 70 70 70

Planned

production

100 100 100 0

Projection

inventory

20 50 80 10

Sales forecast

MPSCustomer order

MRP process

O/p reports

Engineering changes

Bill of materials

Service part requirement

material

Inventory transaction

Inventory record file

Gross material required

Capacity v/s load (report)

Shop floor planning report

Production order status


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Information from MPS is generated from two sources

i. Customer orders. ii. Sales forecast.

Based on these two information, MPS will give the requirement of particular product for each

period of duration (quarter is minimum).

2. BOM file: It is updated with any engineering changes like change in design of product or

change in material.

3. Inventory record file: This file is updated with inventory transactions and gives

information of status of inventory of items.

4. Service part required: These are requirements of parts in addition to normal requirement

for a particular product (like spare).

Example problems on MRP system:

Product structure of P1 and P2:

P1 P2

S1

(1) S2

(2) S3

(1) S4

(1)C1 (1) C2 (4) C3 (1) C4 (2) C5 (1) C6 (1) C4 (1) C5 (2) C7 (1) C8

(1)

M4 M4

MPS

Week 6 7 8 9 10

Product P1 50 100

Product P2 70 80 25

Initial inventory for M4:

Period 1 2 3 4 5 6


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Item raw

material

(M4)

Gross

requirementSchedule

receipt

40

On hand

50

40

Net

requirement

Plannedorder

Lead time (in weeks)

Assembly Manufacturing lead time Ordinary lead time

P1 =1 C4 =2 M4 =3

P2 =1

S2 =1

S3 =1

Product P1 1 2 3 4 5 6 7 8 9 10

Gross requirement 50 100

Schedule receipt

On hand 0

Net

requirement

50 100


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Planned

order

release

50 100

Written, proof read and corrected by

T. Srikanth, D. Dileep Reddy

Product P2 1 2 3 4 5 6 7 8 9 10

Gross

requirement

70 80 25

Schedule

receipt

On hand 0

Net

requirement

70 80 25

Plannedorder

release

70 80 25


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Unit-II

INVENTORY CONTROL

Syllabus: Objectives, scope of the problem, economic and social complications of inventorymanagement, control systems approach, limitations of inventory control. Functions of inventory,

demand and production characteristics. Measures of inventory performance. Systematic control ofinventory: Fixed order quantity systems, fixed interval systems, (s, S) systems, classification ofitems in inventory. Computer based inventory control systems.

Objective of Inventory Control:

1. To minimize capital investment in inventory by eliminating excessive stocks.

2. To ensure availability of needed inventory for uninterrupted production and for meetingconsumer demand.

3. To provide a scientific basis for planning of inventory needs.

4. To tiding over the demand fluctuations by maintaining reasonable safety stock;

5. To minimize risk of loss due to obsolescence, deterioration, etc.

6. To maintain necessary records for protecting against thefts, wastes leakages of inventoriesand to decide timely replenishment of stocks.

Scope of the problem:

The objective of a production planning, scheduling and inventory control in the face of uncertain

market conditions and in maintaining a reasonable level of inventories of all type is almost auniversal problem in business. Production planning problem arise from the need to manage the

internal operations of the production company in the face of outside demands. The objective of

production planning scheduling control of inventories is to minimize frictions in the internal and

external relationships. The problem of planning and scheduling the production of inventories

spread all over the operators concerned with the manner of production Vs time interaction between

production , distribution , locations and size of physical stocks. This problem occurs at almost

every step in the production process whether purchasing, production of in-process material,

finished production, distribution of finished product, or service to the customer. Some relatively

existing problems are cost factor and other factors are subjected to chance errors.

Economic and social implication of inventory management:

Inventories are a type of industrial asset which are far from earning no profit but serve definite

functions if effectively used and earn returns like other assets. The returns are expressed asset-

assert ultimately in terms of increased human productivity. Inventories may need lowered labour

and training cost, lessened requirement for other capital assets such as production capacities or

improved ability to meet customer need in most cases, inventory is essential to the operations a


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production system as are plants, machines and transport equipment. However management of other

assets if they contribute fully to human productivity. Inventory accumulation and depletion have

long been recognized as a major contributing factor to the fluctuation in business activity.

Inventory accumulation and depletion have long been recognized as a major contributing factor to

fluctuations in business activities. Businessmen as individual cannot expect to eliminate entirely

the effect of inventory fluctuation .i.e., inventory build-up or depletion. When the forecast onstability on community well-being is receiving from attention from economic groups.

Efficient inventory management and production planning are an essential part of a business

program to achieve employment stability. Inventories give the business flexibility at reasonable

cost to meet the demand of consumers

Control system approach;

Control over inventories means good long range and intermediate planning of production

planning, good production scheduling and good methods of control. The comprehensive and

integrated system including the production planning, scheduling and control must be closely

coordinated with other planning and control activities such as cash planning, capital budgeting and

sales forecast as it impinges on a wide range of production, sale financial policy, and other

operating decision.

The specific planning steps and timing will vary from one company to another depending on

product and process requirements but the essentials of an inventory control system can be grouped

into three broad classes;

1) Long range planning

2)

Intermediate policy making3) Short term scheduling

1. Long range planning: Long range planning is to budget capital for facilities and inventory

investment .This is done to arrive at a balanced capital budget in view of long business forecast

and possible errors in this forecast. The long term plan makes use of demand forecast and

preliminary policy decision on capital allocation the value of risk assumed. To show the

implications of policy choices and help refine them and then provide a basis for long term operating

decisions.

2.

Intermediate policy making: It is a basis for short term scheduling. Decision must be made onwhat money is currently north, what current service requirements are .General plans must be laid

out for using the existing facilities in the height of sales forecast. It helps in determining the level

of stocks that maybe needed to build-up in advance of sales peak, to stay within plant capacity,to

keep employment fluctuations at an acceptable level or to balance inventory and production costs.

3. Short term scheduling: Short term scheduling work arraignment is to keep the facilities, men


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employed, stocks balanced in view of the demand for output. This must be done within consistent

framework of policies governing the level of production and employment to be maintained. Size

of inventory investment, service to customers, warehouse be maintained. The

inventory serve as cushions in each of these stages of planning to absorb the stocks of demand

forecast error and to permit more effective use of facilities and staff in case of demand fluctuations.

Functions of Inventory control:

a) The primary function of inventory is to use marketing and production to increase profitability, to get the maximum amount for the business' investment.

b) Basically inventories serve to de-couple successive operations in the process of making a product and getting it to customers.

c) Inventories will not force the consumption to adapt to the necessities of production.

d) Inventories free one stage of production distribution process from the next, permitting eachto operate economically.

e)

Basically inventories serve to de-couple successive operations in the process of making a product and getting it to customers.

f) Inventories will not force the consumption to adapt to the necessities of production.

g) Inventories free one stage of production distribution process from the next, permitting eachto operate economically.

h) To ensure against delays in deliveries.

i) To allow for possible increase in output.

j) Maintain smooth and efficient production flow.k) To keep better customer relations.

l) To take advantage of quantity discounts.

m)

To utilize to advantage price fluctuations.n) To ensure against scarcity of materials in the market.

o) To have a better utilization of men and machinery.

Limitations of Inventory control:

a. Efficient inventory control method can reduce but not eliminate business risks. b. Inventory planning and control procedures can only help business in assessing risks

and plan a strategy.

c. Best an inventory control system can do is force the business decision which balances the objective of the firm.

d.

The control of inventories is complex because of the many functions it performs. Itshould be viewed as shared responsibilities.

e. The objectives of better sales through improved service to customer; reduction ininventories to reduce size of investment and reducing cost of production bysmoother production operations are conflicting with each other.

f. Efficient inventory control method can reduce but not eliminate business risks.


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g. Inventory planning and control procedures can only help business in assessing risksand plan a strategy.

h. Best an inventory control system can do is force the business decision which balances the objective of the firm.

Demand Characteristics:

The demand characteristics strongly influence the production and inventory control system in thefollowing ways:

1) The size and frequency of order

2) Uniformity or predictability of demand

3) Service requirements or allowable delay in filling orders

4) The distribution pattern

5) The accuracy, frequency and detail of demand forecast

1. Size and frequency of order; The planning must take into account the characteristics size of

order. The same total volume sold in a large number of small order can characteristics be supported

by substantially less inventory than is sold in a few large order unless special measures are taken

to reduce uncertainty about the time when individual large orders are received.

2.

Uniformity or predictability of demand: Handling large, unpredictable fluctuations requires

flexibility and additional capacity in the inventory production as well as carefully designed tools

for adjusting or controlling inventory balance, but where fluctuations are predictable, the advanced

planning technique can be used.

3. Service requirements or allowable delay in filling orders: Where allowable delays are small

inventories and production capacity must be corresponding greater. Care is required to be oncethat control system really responds to the need.

4. The distribution pattern: If there are more number of stages between the shipment going fromthe factory and reaching the consumer, the more inventory is required. Generally, the various

stages in this distribution system are field warehouse, wholesalers, retailers, etc.

5. The accuracy, frequency and detail of demand forecast: Fluctuations in stocks exits basically

as the forecasts are not exact/ precise. The inventory problem of a business is directly related to

its inability to forecast demand with precision. The responsibility of forecast errors for the

inventory needs should be recognized. A control system should be adapted to the types of

forecasts and forecasting accuracy that one possible.


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Production Characteristics:

The Production Characteristics which include the scheme of production and inventory control are:

a. Type of production Organization

b.

The number of manufacturing stagesc. The degree of specialization of product at specific stages.

d.

The processing time required at every stage

e. Production flexibility

f. Capacity production and ware housing stages.

g. Kind of processingh. Quantity requirement shelf life limits and obsoleteness risk.

Measurement of Inventory Performance:

The inventory in a stocks area will be depleted as the demand is based in a well – run inventory

system, all normal demand on a stock area will be filled within some specified or the service time.At some point of time, the control system will operate to place a demand for replenishment on the

operation feeding the stock area. The demand may call for replenishment in an economical batch.

Operations cannot proceed until all the items demanded are available. It will have to wait a time

equal to the longest serving time of a stock area feeding it. If all the materials are available, the

operation itself will take sometime which is known as processing time.

There is no single index that serves to describe the performance of a inventory. The three inter-related factors that must be considered in the rating the performances of an inventory are:

a.

Size of the inventory b.

Cost of replenishment

c. The degree to which it provides the stock when demanded.

The inventory can be reduced if the firm is willing to buy or produce in small replenishmentquantities at an increased cost.

Systematic control of Inventory:

Task of inventory management is to control through the selection of the time order and quantity oforders, taking into account the likely future requirement (demand) and the maintaining their

estimate, Inventory management, in short, implement the high level policy decision in a best sense.Good decision regarding the timing of replenishment of the order quantity and forecastconsiderations.

There are various forms of inventory control system. The choice of system for particularapplication depends on the information available for its operation and the level of performances


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desired of the inventory. The following are the three inventory control systems which are usedwidely.

Fixed order Quantity system (Q-system), Fixed Inventory system (P-system),

(s, S) system.

Fixed order quantity system (Q system):

It is probably the oldest and most common recording system which used fixed order quantity at a

variable ordering interval. Under this system, same quantity of material is always ordered. Time

of order placed is allowed to vary with fluctuation in usage. The working of this system is shown

in the following figure.

In this system an order is placed whenever inventory level is just sufficient to meet a reasonablemaximum demand over the course of replenishment lead time. A system with fixed order quantity

can be specified by

1. The lead time (L) between placing and receiving an order

2. The order size (q)

3. Safety stock (s)

4. The expected demand rate (d)

5.

The expected inventory balance i.e., if demands were made uniformly at the expected rate(e), then the inventory balance (I) over the time is safety stock + half the order size (q)

I = s + q/2.

Advantages –


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It is simple and reliable

It is comparatively cheap to operate and easy to explain to new stock control personnel

Reorder point is indicated easily

Each item can be purchased in its EOQ.Disadvantages –

When different items have to be ordered from the same supplier in order to reduce

transportation cost or to take advantage of credit or discount, it is necessary to order

several items simultaneously even when only one reaches the reorder point, while the

basic idea is that items are independent of each other in the replenishment procedure.

Because of absence of adequate data on stock levels and consumption rates in the

simpler form, it is difficult to re – evaluate order quantity.

Two bin system or Q system is more suitable to class C items

P – System: The use of fixed reorder cycle with variable order quantity is a major alternative open

to the use of fixed order system or Q – system, where uncertainty forces departure from the pattern

of uniform order quantities placed at regular intervals. The periodic reordering system or fixed

interval systems are more popular and are frequently used particularly where some type of booked

inventory control is employed and where it is convenient to examine inventory stocks on a fixed

time cycle. Continuous review of inventory balances which is required in fixed quantity system

maybe awkward and extremely expensive. As an alternative to this system, inventory balance on

indicated items will be periodically renewed in fixed interval systems either daily, weekly or

monthly. A variety of rules or procedures can be used but the basic idea underlying all of them is

the same namely check of the stocks on a fixed frequency. Example: check once a month and place

the replenishment order based on the amount used or demanded since the last review as shown in

the figure.


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.

Advantages:

The main advantage of this system over the two bin system is that all orders for

replenishment are issued at the same time.

The ordering mechanism is regular and not subjected to warning signals from the stores.

Disadvantages:

Usually more stock is held when this system is adopted than with two bin system

The ordering cycle system can be classified as

1. All items in one cycle – in this type all the items are replenished every cycle. This method

is useful when the number of items are not too large and the rate difference is not too much

2. Multi cycle – in this type the items are divided into groups and each group has its own

ordering cycle, independent of the other groups. The groups are formed either by selecting

items that have to be ordered from the same vendor or by taking items whose use rates are

fairly equal.

(s, S) System: This class of system is used to review inventory stocks on a periodic basis and


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replenishes these stocks only when on – hand and on – order stocks have fallen to or below a

specified level. When this happens, an order is placed to bring the amount of stock on – hand and

on – order up to a specified maximum level. The frequency of review and the minimum and

maximum inventory points can be determined by the methods similar to the earlier ones. This

system of control is particularly useful when the cost of making the review and the cost of placing

an order are separate and significant. This class of system has been named the (s,S) system. The

ordering rule for an (s, S) system is very simply stated as “if fewer than s units are available on –

hand then order enough to bring the stock up to level S else do not order”. The application of (s, S)

system is as follows:

1. Choose two inventory levels s and S, where S is larger than s

2. At each review period, compare the available inventory ‘I’ with s and S3. If I lies between s and S, place no order. If I is at or below the level s, place an order for an

amount equal to (S-I).

Classifications of Items in Inventory:

Inventory in accompany consist of thousands of different items in stoke. The control of all thisitems creates series problems to the management if the same amount of control is exercised on eachof these items. Therefore in order to execute proper control it is necessary to take selective approachand find the attention required for each item according to it’s important. Thecommonly used systems can be classified as:

1.

ABC ANALYSIS ( Always Better Control Analysis) :

ABC classification is an important technique to classify the materials of inventory into threecategories on basis of cost and volume.

Class A items – 5 – 15% of volume, 60 – 75% of cost

Class B items – 30 – 35% of volume, 15 – 20% of cost

Class C items – 50 – 60% of volume, 5 – 10% of cost.

Steps in ABC analysis:

1.

Calculate the annual usage in units for each item. 2.

Calculate the annual usage of each item in terms of rupees (annual usage × unit cost). 3. Rank the item from highest annual usage in rupees to lowest annual usage in rupees. 4. Compute the total value. 5. Find the percentage of high, medium and low item in terms of total value of items.


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Part Total volume % of total value % of total % of cumulative

of product Quantity of quantity

9 30600 35.83 6 6

8 16000 18.7 5 11

2 14000 16.39 4 15

1 5400 6.64 9 24

4 4800 5.6 6 30

3 3900 4.6 13 43

6 3600 4.2 18 61

5 3000 3.5 10 71

7 2400 2.8 17 100

Part Unit cost $ Annual usage units Total cost $

1 60 90 5400

2 350 40 14000

3 30 130 3900

4 80 60 4800

5 30 100 3000

6 20 180 3600

7 10 170 1700

8 320 50 16000

9 510 60 30600

10 20 120 2400


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2. VED ANALYSIS (Vital Essential and Desirable Analysis ):

It pertains to the classifications of maintenance of spare parts. The spares are split into three

categories of importance form the view point of functional utility. V- Refers to Vital items without

which the production activities or any other activities of the company would come to a halt, or at

least be drastically affected. E- Refers to Essential items without which the performance or

efficiency of the equipment will be reduced non availability of these items may result in loss of

productivity. D- Refers to Desirable items, these items which do not cause any immediate loss in

production fall under this category.

3. SDE ANALYSIS (Scares Difficult and Easily available Analysis):

This analysis is based on availability position of each item. In this analysis S-Refers to Scarce items

which are short in supply and their availability is scarce .This includes important items. D- Difficult

items which cannot be produced easily. These items may not be available in local market and have

to procure from far of items .These items for which there are limited number of items. E- Refers to

items which are easy to acquire and which are available in the local market.

4. HML ANALYSIS (High Medium and Low Cost Inventory Analysis):

In ABC analysis total annual usage is considered we may come across quite a view of items which

fall in to B category although cost is high. In HML analysis unit cost is also considered in ordered

to find out the important of the items. Limits of unit cost are fixed for high cost items and all the

items are segregated into High, Medium and Low categories depending upon unit cost. This

analysis is quite useful in deciding safety cost in relation with availability of the material.

5. MNG ANALYSIS (Moving and Non Moving items Analysis):

In this analysis M-refers to the moving items. The rate of consumption of this items is quite high,

N-refers to Non-moving items. These items are those which are not consumed in the last 1 year.This are those items which have nil balance both at the beginning and at the end of last financial

year and there was no transaction during the year. These are non-existing items for which the store

people keep bin cards showing the nil balance.

6. FSN ANALYSIS (Fast moving, Slow moving and Non-moving Analysis):

By doing FSN analysis materials can be classified based on their movement from inventory for aspecified period. Items are classified based on consumption and average stay in the inventory.Higher the stay of item in the inventory, the slower would be the movement of the material.

F – FastMovingS- Slow Moving N- Non movingSometimes the terms FNS is also being used, whereF – Fast Moving N- Normal MovingS- Slow Moving.


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The following steps in doing the FSN analysis:1. Calculation of average stay and the consumption rate of the material in warehouse.2. FSN Classification of materials based on average stay in the inventory3. FSN Classification of the material based on consumption rate, finally classifying based on

above FSN analysis.

Computer based inventory control system:

Inventory management has been described as a task in control system operations. Decisions

regarding the timing and quantity if replenishment orders are made according to the rules derived

from the statements of management policy and observations of demand rates and costs in day – to

– day operations, the inventory manager monitors the status of the inventory and makes routine

application of these decision rules to order replenishment. For an inventory of few dozen parts, the

procedures of data collection and transmission, stock status review, demand forecasting and

ordering can frequently be reduced to simple, routine procedures and calculations which can be

handled manually or with simple computational aids. However, inventories with many thousands

of items in the distribution industries like food and drug wholesaling in a particular single stocking

point, more than 20,000 items and some of them might contain upwards of 100,000 items. Manual

control of inventories on such items does not permit manual effort and is not economically viable.

The advent of a strong programmed computer has shifted this point of economic balance. A greater

distance in the direction of effective control of inventory. It is now possible to apply the most

sophisticated decision making to the control of multi thousand item inventories by incorporatinginventory records (withdrawal and receipts) into the data processing system of a firm equipped

with the modern capacity computers. Such computers can maintain inventory records as part of the

normal flow of business transactional data. The decision rules can be programmed and stored for

use by the computer which can make the routine recording of decisions. Packaged programs for

forecasting, order quantity and the number of inventory analysis routines are available today, which

perform various operations related to inventory control.

ByCharla Saikishore-2210812213

Nallu Arun Reddy-2210812244


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UNIT III

Syllabus: Cost factor: The importance of costs, elements of costs, principles of costdetermination and accounting systems, production and inventory cost factors, other costs to thefirm.

Economic quantities of manufacture or purchase: Lot size problems, finite production rates inmanufacturing, quantity discounts.Uncertainty: Effects of uncertainty, demand and supply, safety stock, role of forecasting in

production and inventory control. Uncertainty in production cycling

IMPORTANCE OF COSTS:

Costs, balancing of opposing costs, lie at the center of all production and inventory

control problems. Costs are play an important in inventory control and production planning

problems as the cost involved helps the firm to decide how to maintain level of inventory and

manage the total capital present in the company to meet the customer’s order.

Cost information often can be obtained from accounting records but typically it

requires a reorganization or restatement of all the accounting costs to arrive at cost definitions

suitable to the particular problems at hand. There are, at times, costs which must be derived by

experimental methods or statistical means. There is a distinction between accounting costs for the

historical and financial reporting, and operational or functional costs to be used in aiming at policy

or day to day management decisions.

The accounting and operational costs are often confusing because accounting organizations and

records are usually the major source of cost information in production and scheduling problems,

and an essential early step in the analysis of production and inventory problems. The cost

accounting system employed in a particular process includes methods for collection of direct costs,

and allocation of overheads and the method for valuation inventories by which various cost

elements are assigned to management units.

Principles of cost determination and accounting systems:

Accounting costs are derived under the principles of accounting developed over

many years. In any particular business, the specific methods and the degree of accounting skill

might vary but all of them have the basic objective of accounting procedures to provide a fair,

consistent and conservative valuation of assets in the business. Accounting methods have

traditionally been strongly influenced by the objective of making a record of the flow of assets

through the business. In recent years accountants have tended to evaluate the controlled use of

costs in making operating decisions and exercising operating control,


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Accounting systems typically distinguish three kinds of costs:

1. Direct costs: Direct costs are those which can be directly associated with a specific

joborder, batch of material, or item. Example: raw material (it includes raw material cost,

wage cost of workers directly operating the production equipment, and the cost of

production)

2. Indirect costs: This may include the cost of supplies used to service a machine, wages

ofprocess operators not directly related to a particular job such as the setup men, sweepers,

cleaners etc.

3. Overhead costs: Overhead items include factory overhead such as building andequipment

depreciation, factory supervision, and general overheads such as administrative staff andsales staff etc.

The two basic types of accounting systems can be distinguished based on actual costs and standard

costs.

Under the actual costs system, the product costs are based on accumulation of the actual direct cost

incurred on a given job or item during a period of time.

Under the standard costs system, the actual cost will also be collected to varying degrees of detail

as a check on the reliability of the standards and control devices.

Functional and operative costs:

Contrasting the principles underlying accounting costs, the definition of costs for

production and inventory control may vary from time to time depending on circumstances and the

length of time being planned. These costs are defined subject to criteria:

1. The costs shall represent out – of – pocket expenditures i.e., cash actually paid out or

foregone opportunities for profit.

2. The costs shall represent only those out – of – pocket expenditures or foregone

opportunities for profit whose magnitude is affected by the schedule or plan.


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Elements of costs:

The costs that are affected by the firm’s decision to maintain a particular level of

inventory are called the costs associated with inventory control or relevant inventory costs.

These relevant inventory costs play an important role in the study of an inventory system.

These costs may be classified as

1. Purchasing costs

2. Ordering costs

3. Inventory carrying costs

4. Storage costs

Total inventory costs: If unit cost of an item depends on the quantity purchased, that is

price discounts are available, then it is necessary to formulate an inventory policy which

takes into consideration the purchase cost of the item held in stock also. The total inventory

cost is given by

ITC = Purchase cost + total variable cost to maintain inventories

ITC = purchase cost + total ordering cost + inventory carrying cost+ storage cost

1. Purchase cost: The cost of purchasing a unit of an item is called purchase cost. It

is theactual price paid for procuring of items. The unit price of item depends on the

size of the quantity ordered or purchased or manufactured. This is given by the

relation

Purchase cost = cost per unit × demand per unit time

= Cu × S

2. Ordering cost: It is the cost of placing an order from a vendor. This includes all

the costsincurred from calling for quotations to the point at which the item is taken

into stock. It consists of the expenditure connected with

a. Receiving quotations

b. Processing purchased requisitions

c. Receiving materials and inspecting it

d. Following up and expediting purchase order

e. Processing seller invoice.


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If C0 is the cost of placing an order and q is the quantity of order, then the unit cost of

placing an order is C0/q and this decreases as the order quantity is increased which means

the bigger the amount purchased in one lot, the lesser the unit ordering cost. If S is your

annual requirement, then annual ordering cost is (S × C0/q)

3. Inventory carrying cost: Carrying costs, also known as inventory holding costs, are

thecosts incurred in maintaining the inventories in the firm. They are based on average

inventory and consists of

a. Storage costs, which includes rent of storage facilities, salaries of personnel, and

related storage expenses, electricity and maintenance etc.

b. Cost of obsoleteness: If too much of inventory is present in the course of time, the

product may cease its demand

c.

Cost of deterioration and spoilage

d. Cost of insurance

e. Cost of capital etc.

If i = rate of interest then annual storage cost = Cu× i x q/2

4. Shortage or stock out cost: When an item cannot be supplied, or the

consumer’sdemand, the penalty cost for running out of stock is called shortage or stock

out cost.

If the item is not in stock, some of the customers are not ready to wait and therefore,

there is a loss of scale, in this case, the shortage cost includes the loss of potential in

terms of unit of the item demanded, but where not available and loss of good will,

permanent loss of customers and its associated loss of profit in future sales. Shortage

cost in planning period maybe calculated as:

Shortage cost = cost of being short of one unit × average no. of units short in the

inventory

Where, average no. of units short in the inventory for a planning period is determined

as follows:

Average no. of units short in the inventory = [ℎ+ℎ] ×time2


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Other costs to the firm:

1. Capital costs: It is the cost of obtaining capital for use in supporting or financing

operations. This may be obtained by

a. Cost of borrowing funds from bank.

b. Cost of diverting capital from other possible uses i.e. share markets etc.

Capital costs in inventory or production planning problems break down to

investment in inventory or other facilities. This is based on the rate charged per

dollar. The amount earned in return is the profit of the capital invested out-of-

pocket.

Inventory investments are the out-of- pocket or unavoidable costs for material,

labour and overhead of goods in inventory.

2. Marketing costs: An important objective in most production planning and

inventory control systems is maintenance of reasonable customer service. An

evaluation of the worth of customer service or, alternatively, the loss suffered

through lack of customer service, is an essential aspect of the derivation of a

minimum-cost scheduling or inventory-control system. And other promotional

costs come under this criterion.

3. Clerical cost: Clerical costs are one of the most difficult costs associated with

production and inventory control to measure at the present time. Clerical costs

include such items as the cost of making out a requisition and placing an order, the

cost of time of personnel required for scheduling and the cost of inventory reviews

for reordering purposes.

Lot-size problems:

Case 1:

Determining Economic Order Quantity for Inventory Model with uniform demand:

The fixed order quantity system is based on selection that order quantity which will

minimize the total variable cost of managing the inventory. In determining ‘Economic

Order Quantity’ it is assumed that the cost of two parts

Ordering cost and

Carrying cost


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Economic Order Quantity (EOQ):

Economic Order Quantity is that order quantity which will minimize the total variablecost of managing the inventory.

Methods of calculation of EOQ:

Assuming that the inventory decreases at a constant rate from the order quantity ‘q’ to

zero and then replenished by another quantity.

Symbols used:

Let,

S=Annual consumption of the products (units),

.=Cost of placing an order,

.=Unit cost of an item (unit per Rs.),q=Order quantity (units),

i=Interest rate charged per unit per year. Now,

The total variable cost of managing the inventory per year

=Annual ordering cost+ Annual cost of carrying the inventory= E say.


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Therefore,

E= (No. of orders per year)x(cost of placing an order)+(Average inventory)x(Inventory

carrying cost)

E=x

+

2.

.i

E=x+ 2. To determine EOQ() that minimizes the total cost of managing the inventory, we mustdifferentiate E w.r.t decision variable ‘q’ and set the first derivative to zero, for minimum

total cost = 0.

Therefore

.

=

−.

+

.i.1

2=0

.. = .2

.2= 2...i Therefore,

EOQ() = √ 2( )

Problem: A company requires 16000 units of raw materials costing Rs.2/- per unit. Theordering cost is Rs.45/- and the carrying cost are 10% per year per unit of the average

inventory. Determine the economic order quantity, cycle time, total variable cost of

managing inventory?

Ans: EOQ=√ 2∗16∗452∗.1 =2683 units

Frequency =16

2683

=6

Cycle time =12 6 =2 months

Variable cost =16∗452683 2∗.1∗26832

=Rs.536.65/-


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Problem: A company needs 2000 units per months. cost of placing an order is Rs.40/-.In

addition to which Rs.0.50, the carrying cost are 10% per unit of average inventory per year.

When the purchasing cost is Rs.10/- per unit, find the economic lot size and the total

minimum cost?

Ans: EOQ=√ 2∗2∗4∗121.5 =1131 units

Carrying cost (s)=24000

Total minimum cost= 10*24000+24000*( 41131)+1.50*(11312 ) (no storage cost here)

=Rs.241697/-

Case 2:

EOQ Problems with several production runs of unequal length:

EOQ problems with several production of unequal length replenishment instantaneous.

With varying demand rate the cost will be exhausted at different time periods. The policy

of ordering same quantity for replenishment of inventory, the situation can be represented

graphically,

Let

.1,.2,3,………. = demand in different time periods;12 3+……+. = Total demand in time T;T = 1+2+3+…..+ Cost of ordering in time T =

x


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Cost of purchasing S units = S x Now inventory carrying cost for time T = (Average inventory in time1).i+(Averageinventory in time2).i+………+(Average inventory in time).i=

12(

. 1)

.i+

12(

. 2)

.i+……..+

12(

. )

.i

=12(. .i)(1+2+3+…..+)= 12(. .i)T

Hence the total cost incurred in time T

=. +.S+ 12(. .i)T

Minimizing w.r.t , .= √ 2..

.i.T

Here,

. = +++⋯…+.+++⋯..+ = Average demand in different periods.

Case 3:

ECONOMIC ORDER QUANTITY WHEN STOCK REPLENISHMENT IS NOT

INSTANTANEOUS (GRADUAL REPLESHNISHMENT OR FINITE

REPLENISHMENT)

It is more general and realistic situation. Suppose it takes time 1 for replenishment andtime 2 is required for inventory to be exhausted. In this case each order cycle is of(1+2) time units. Again the demand rate in each cycle assumed to be uniform. Theinventory pattern under this model appears as shown in Fig.12.7


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Fig 12.7

Let,

S = Annual consumption

= Cost per unit = Cost of placing an order

p= rate of replenishment per unit of time (in units)

d= daily consumption rate1 = time for replenishmenti= Inventory carrying cost (decimal)

Then inventory under this system builds up at the rate (p-d) and is maximum at the end of

production run.

Maximum in inventory at the end of production run = (p-d)1 Therefore, average inventory =

p−d2 = P−d2 * 2 (where q= quantity replenished during time 1=p* 1)= 2(1-)

Thus, annual inventory carrying cost = 2(1-)..i


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And annual cost of ordering =*

Therefore,

Annual variable cost of managing the inventory = Annual cost of ordering + Annualinventory carrying cost

E=. + 2(1-)..i

= −. + 12(1-)..i.=0 (for minimum total annual cost)

=

2.

1−..i

Case 4:

EOQ PROBLEMS WITH PRICE BREAKS :

The EOQ formulae under the basic EOQ model are based on the assumption that the

price per unit is fixed irrespective of the order quantity. However, sometimes suppliers

offer discount in large quantities are purchased. Quantity discounts reduce material cost

and procurement cost but increases the inventory carrying cost. Therefore, a decision has

to be whether the purchaser should stick to EOQ or raise the order the quantity to take

advantage of price discount.

When there is only one price break, the situation may be as follows:

Range of quantity Purchase cost per unit

0≤Q1


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Step 1- calculate Q2 i.e., optimum order quantity for lowest price (highest discount) i.e.,

Cu12 and compare it with quantity b1

Step 2 -if Q2> b1 then optimum order quantity will be Q2 i.e., Q0 = Q2

Step 3 - if Q2 < b1

In order to obtain the optimum order quantity we have to compare the total inventory cost

for Q = Q1 with Q = b1

If T(Q1) > TC (b1) then Q0 = b1 otherwise Q0 = Q1

Problem: ABC manufacturing company requires special involute gears at the rate of 300

numbers per year. Each gear costs Rs.36. The procurement cost and inventory carrying

cost are estimated at Rs.30 and 20% respectively. If the supplier offers a discount of Rs.2

per gear or an order of 200 or above, will it be advisable to purchase higher quantity?

Ans: Here,

S= Annual consumption =300

= Procurement cost/order= Rs.30. Cu1 = Basic price per unit= Rs.36

. Cu2 = Discount price per unit= Rs.34

i = Inventory carrying cost =0.20

The above prices are valid for the following quantities:

Price/unit Range of quantities

Rs.36 0=


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Calculating annual total cost (including material cost) for the quantity to be purchased at

the two price levels (for 50 and 200 units)

Cost Order quantity 50 Order quantity 200

Annual cost of material 300×36 = 10,800/- 300×34 = 10,200/-

Annual procurement cost 30×300/50 = 180/- 30×300/200 = 45/-

Annual inventory carrying

cost

0.5×50×36×0.2 = 180/- 0.5×200×34×0.2 = 680/-

Annual total cost C 10,800+180+180 = 11160 10,200+45+680 = 10,925

Since TC1


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become much more complex, basically because of an inability to react immediately to

random influences. Lacking ability to organize their manufacturing and sales activities

thoroughly enough to control both the driver s and their customers’ habits, the only way

out is to carry some additional stock — safety stock.

Safetystock:

Safety stock is needed to cover the demand during the replenishment lead time in excess

of the expected demand. The need results from a combination of the delay between the

time a replenishment order is placed and the time the material is received and uncertainty

as to how much material will be required during the replenishment lead time. In practice,

the safety stock held by an inventory is the stock on hand at the time replenishment stocks

are received.The approach to eliminating difficulties resulting from exhaustion of stocks

before a replenishment supply is received is clearly to keep some additional inventory on

hand which can be drawn upon in case of emergency, but not to count on this inventory in

determining when to place a replenishment order. The objective is to arrive at a reasonable balance between the amount of extra inventory (and its capital, storage, and other cost) and

the protection obtained against stock exhaustion. As more and more inventory is set aside,

either figuratively or in fact, as safety stock, the chance of stock exhaustion becomes ever

less. However, the amount of protection which each additional unit of safety inventory

buys characteristically drops as more inventory is added, and thus the return from

increasing inventory balances diminishes rapidly. The question is: How much additional

inventory as safety stock can be economically justified?

Safety stocks illustrate how inventories “decouple” one stage in a production and

distribution system from the next, cutting the amount of over-all organization or control

needed. Safety stocks separate one part of the production and distribution system from theuncontrollable shocks and uncertainties arising in another, e.g., as a result of sales

fluctuations and transit or production delays.

Most reordering systems, whether for in-process materials, for replenishing raw materials,

or for replenishing finished stocks in a warehouse, must be designed to take uncertainty in

usage rates or in delivery times directly into account. In circumstances like the Brown &

Brown case, where demand is fixed and constant, the result is a fixed amount reordered at

fixed intervals. However, where usage or demand is uncertain or fluctuates, it is not

possible to keep both the size of orders and the interval between orders fixed. A common

way to approach reordering problems in the face of uncertainty is to fix the size of the order

placed, by the means used in the Brown & Brown case, and then let the ordering frequency

vary to take up fluctuations in usage. Another common method is to fix the ordering

frequency or the length of time between orders and then let the size of orders vary with

usage. In either case an extra amount of inventory, or safety stock, must be carried to fill

unexpected surges in demand between placing and receiving orders.

Systems designed to handle uncertainty fall into two basic categories: those in which the

order size is fixed but the order interval depends on actual demand, and those in which the


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inventory is reviewed periodically and restored to some predetermined level. The practice

of ordering a fixed quantity when needed, essentially the “two - bin” system in common

stock- room or factory use, assumes that individual inventories are under constant watch.

The plan for ordering at fixed periods, i.e., monthly, weekly, or quarterly, is frequently

used in warehouse control systems or for handling inventories involving a very large

variety of items under some form of clerical control. While the two schemes are basically

similar in concept, they produce somewhat different results, as will be seen. Other systems

intermediate between these two offer the advantages of each in particular circumstances,

while still others are designed to minimize effects of uncertainty through “explosion”

techniques.

Forecasting in Production:

The stages or steps in a production forecasting process are listed as follows:

1. Fix the forecasting objectives.

2. Decide what to forecast?

3. Determine the time frame.

4. Collect the data for forecasting.

5. Select the forecasting model

6. Build and test the forecasting model.

7. Prepare the forecasts.

8. Prepare the forecasts.

9. Compare events with the forecasts.

Now let's discuss each step of production forecasting process one by one.

1. Fix the forecasting objectives:

The production manager must first fix the forecasting objectives. That is, he must know

exactly why he is doing production forecasting. Forecasting objectives answers the

question like, why are we forecasting? Here, the answer to this question may be; we aredoing forecasting to help us in marketing planning, or we are doing forecasting to help us

in the plant capacity planning, etc. If we know exactly why we are forecasting, then we

can collect proper data for that purpose. This will result in more accurate forecasting.


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2. Decide what to forecast?

After finding out why to forecasts, the production manager must answer the question,

what to forecast? That is, are we forecasting the volume of production, value of sales, the

amount of finance required, number of workers required for future production and so on.The production manager must decide the units of measurement such as volume, value,

etc. for forecasting.

3. Determine the time frame:

The production manager then fixes or determine the time frame for the production

forecast. That is, he must answer the question, for what period are we making a forecast?

In other words, whether the forecast is made for a week, a month, three months, six

months, one year or more.

4. Collect the data for forecasting:

The production manager must fix the database. That is, he must decide from where he

will collect the data for forecasting. In other words, he must decide whether to collect

data from internal sources or external sources. He must also decide whether to use

quantitative data or qualitative data. So, in this fourth step, the production manager

decides about the type of data which he will use for forecasting.

4. Select the forecasting model:

5. In this step, the production manager must decide the method or model of

forecasting which he will use. There are many methods of forecasting. There

are qualitative and quantitative methods. The qualitative methods such

as Nominal Group Technique, Delphi technique, etc. are more suitable for new

products. However, for existing products, with stable demand, quantitative

methods such as Simple Moving Average Technique should be used.

6. Build and test the forecasting model:

In this step, the production manager uses a part of the available data to build a forecasting

model. A model is a statistical or mathematical formula. He uses the other part of the data

to test the model. That is, he will apply the formula and see whether it gives the accurate

answer or not. If not, he will make necessary changes to the formula until he gets

satisfactory results.

7. Prepare the forecasts:

After selecting the forecasting model, the production manager must prepare the forecasts

for a specific period for the particular product. The period may be weekly, monthly, etc.

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8. Present the forecasts:

In this step, the production manager gives or presents the forecasts to those who will use

it. He must also supply detailed information about, how the forecast was made, from

where the data was collected, what are the assumptions of the forecasts, etc.

9. Compare events with the forecasts:

Here, in this final step, the actual events or performance is compared with the forecasts.

The deviations are corrected, wherever possible or the forecasts are modified.


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UNIT: IV

SYLLABUS: Scope of production planning, types of production planning, demand

analysis, seasonal and non-seasonal demand. Planning procedures. Setting the

production rate. Short term and long term planning-make and buy decisions, productdesign and process selection, manufacturing planning.

SCOPE OF PRODUCTION PLANNING:

Allocation of production resources

Production planning is the process of deciding on the resources the firm will require for

its future manufacturing operations and allocating these resources to produce the desired

product in the required amounts at the least cost.

Production planning therefore involves setting the limits or levels of manufacturing

operations in for future. Arriving at a production plan requires business management to

make a number of important decisions. Some of these include deciding what the general

size of the labour force will be during the period planned, and if hiring campaigns or

layoffs are when capacities where these are and these will be; setting plant and

equipment being flexible and setting the desired or objective levels for inventory

control.

Production planning sets the framework within which detailed schedules and inventory

control schemes must operate. Production planning is specifically concerned with the

future, with layout to meet future sale with facilities which in some cases may not evenexist. The plan may cover a few months or several years. Typically, in a control system,

production plans may be drawn simultaneously and in possibly different degrees for

varying periods in the future.

For example: -

1) Plans covering the next several months or year may be used to set labor budgets

and inventory goals.

2)

Plans covering, say, 5 years may be used to govern capital-equipment budgetingfor increased capacity.

3) Plans covering, say, 5 to 15 years may be used to govern plant construction and

product development.

Production plans are designed to fix some or all of the characteristics of manufacturing

and distribution operations that give more detailed planning or control.


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Thus the objective of production planning is to arrive at statements about the general

characteristics — the framework of manufacturing operations during the period planned.

This framework should be designed to meet recognized company goals — filling

customers' requirements to the extent they can be foreseen, meeting obligations to

employees and the community for stable operations and minimizing total costs. The costs

in this case include facility and capital costs, including such costs as equipment capacityand inventory costs, costs of labor turnover, and costs of setting up multi-shift operations.

USES OF PRODUCTION PLANNING:

Production-planning methods have two important uses that need to be distinguished.

1) One is direct planning, i.e., drawing up production plans to be followed, subject to

costs that have been estimated and policies that have been agreed on, with respect

to finances, customer services, and labor stability. These plans can be used to

decide where extra capacity is needed and to set manufacturing operations.

2) The other important function of these planning techniques is to give

business management guides for use in setting the basic policies by themselves.

Business management often must make judgments about qualitative factors they

find difficult to weight. One method of helping to make these judgements is to lay

out plans under alternative assumptions about policy decisions, to make clear

impact on capacity and labor requirements, customer service, and financial needs

of alternative decisions in judgement areas.

For example, when forecasts of future demand are subjected to errors, as they usually are,

it may not be easy to decide how far to go in building plant and inventories to meetdemands. Showing the plant and inventory requirements and costs under alternative

decisions and the possible final outcomes will not eliminate the risk or the need for

decision, but it may help management arrive at a sound judgement, knowing the potential

gains and losses associated with alternative decisions. Production-planning methods can

also help direct research and engineering effort to bottlenecks or critical manufacturing

areas where modes and improvements might yield substantial payoffs in manufacturing

economy.

PLANNING TO MEET SEASONAL DEMAND:

Anticipation stocks are carried to meet planned or increases in demand rates. Such stocks

are built to buffer production rates and capacities from the effects of seasonal demand or

surges in demand due to promotional efforts, and to support sales over periods of planned

shutdown such as for plant vacation or maintenance shutdown. This buffering was

identified as one of the major inventory functions in Chapter 2. The approach to the

control of all forms of anticipation stocks is identical to that which applies to seasonally

fluctuating sales. The following discussion of planning for seasonal demand is intended

to treat all forms of anticipation stocks. Seasonal demand patterns result in new types of


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planning problems. "crash " or short peak-season, problems which arise, for example, in

toy industry before Christmas or in certain fashion clothing during various festivals.

DEMAND ANALYSIS:

Demand:

A relation between the price of a good and the quantity the consumer is willing and able

to buy during a given period, other things are constant.

- Demand is a relative concept not absolute.

- It is related to price, time and place.

- The demand for a commodity refers to the amount of it which will be bought per

unit of time at a particular price (in a particular market).

Types of demand:

1)

Individual demand:

The quantity a consumer would buy at a given price, during a given period of time.

2) Market demand: Total demand of all buyers in the market taken to get a given

price during a given period time.

3) Price demand

4) Income demand

Law of demand curve:

Price

Demand


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The above is the law of demand curve and from that we can see that as the price of the

commodity increases the demand for it decreases, and as the price for the commodity

decreases the demand for the product increases. This demand not only depends upon the

price factor but there are also other components which it does depend on.

Determinants of demand:

1) Price of the product

2) Price of the related goods

3) Consumer income level

4) Consumer tastes, preferences

5) National per capita, target per capita, national gdp growth

6)

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7) Future price and demand expectations buy consumer

8) Demography and growth rate of population

9) Climate and weather conditions.

Exception to law of demand:

1) Conspicuous goods – esteem goods

2)

Giffen goods- inferior goods

3) Future expectation about price

4) Irrational consumer

5) Ignorance and unawareness of price

Causes of increase in demand:

1) Increase in consumer income :

- Normal goods(income rises demand rises)

-

Inferior goods( income falls demand rises)

2) Change in price of related goods:

Eg-1-For example consider the competitors like coca cola and pepsi. These two

competitors are always trying to attract customers. Now let us consider that the price of

the cola is increased than the demand for the cola decreases and also the demand for

pepsi increases.


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3) Change in price of related goods:

Eg-2-Now consider the automobile industry where the demand for the tyre manufacturing

is relative to the price of the car prices, if the price of the car decreases the demand for

the tyres increases.

4)

Changes in consumer expectations:

Product is cheaper today than tomorrow.

Demand forecasting:

Forecast is an estimate of future events and trends and is arrived at by systematically

combining past data and projecting it forward in a predetermined manner.

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