Management of

Materials , Machines & Equipments, and Quality Module V Production Management

CRG @ AIM - Production Management 2012

Materials Management
A process encompassing acquisition, shipping, receiving, evaluation, warehousing and distribution of goods, supplies and equipment It is concerned with planning, organizing and controlling the flow of materials from their initial purchase through internal operations to the service point through distribution Material management is a scientific technique, concerned with Planning, Organizing &Control of flow of materials, from their initial purchase to destination

CRG @ AIM - Production Management 2012

Materials Management
Enterprise
Orders
Purchase Requisition from Functional Dept

Purchasing Raw-material Storage

Finished-goods Storage

Receiving

Transformation Processes

In-process Storage
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DIstrIbutIon

Customers
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Suppliers

AIM OF MATERIAL MANAGEMENT To achieve:

1. The Right quality of materials

2. Right quantity of supplies 3. At the Right time

4. At the Right place

5. For the Right cost
PURPOSE OF MATERIAL MANAGEMENT

To gain economy in purchasing To satisfy the demand during period of replenishment To carry reserve stock to avoid stock out To stabilize fluctuations in consumption To provide reasonable level of client services
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Objectives of Materials Management

Primary
Right price High turnover Low procurement & storage cost Continuity of supply Consistency in quality Good supplier relations Development of personnel Good information system

Secondary
Forecasting

Inter-departmental harmony Product improvement Standardization Make or buy decision New materials & products Favorable reciprocal relationships
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Materials Management functions

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Material planning and programming Purchasing and outsourcing (make or buy decision) Receiving & Storekeeping Inspection and quality control Inventory control Codification Vendor rating and management Distribution / Transportation and material handling Cost reduction through value analysis Disposal of surplus / obsolete material Distribution
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Costs associated with Materials Management

Cost of Materials Cost of Ordering Carrying or Storage Costs Cost of Packaging Cost of Material Handling Cost of Shipment Cost of Insurance Taxes and Govt. duties

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Purchasing
Purchasing (also known as Procurement) is the acquisition of goods and services needed to support the various activities of an organization, at the optimum cost and from reliable suppliers Purchasing is the procuring of materials, supplies, machine tools & services required for the equipment, maintenance & operation of a manufacturing plant It is not a service function, but a profit making activity

Goal of Purchasing
Develop and implement purchasing plans for products and services that support operations strategies and cost objectives
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Make-or-Buy Analysis
Considerations in make-or-buy decisions: Lower cost : purchasing or production? Better quality: supplier or in-house? More-reliable deliveries: supplier or in-house? What degree of backward integration is desirable? Should distinctive competencies be outsourced?

CRG @ AIM - Production Management 2012

Principles of Sound Purchasing

(5-R framework)

5 Rs OF BUYING RIGHT SOURCE RIGHT TIME RIGHT PRICE RIGHT QUALITY RIGHT QUANTITY

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Legal Operations Accounting

Purchasing

Data processing

Design
Suppliers Receiving

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Purchasing Cycle

Purchase REQUISITION

SELECT SUPPLIER / Vendor rating

PLACE THE ORDER

RECEIVE ORDER

MONITOR ORDER

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Different Purchase Policies

Centralized vs. Decentralized Purchasing Single sourcing vs. Multi-sourcing

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Inventory Management
Inventory refers to all the materials, parts, suppliers, expenses and in process or finished products recorded on the books by an organization and kept in its stocks, warehouses or plant for some period of time A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)
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 Inventory System - A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be Inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization

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Nature or Classification of Inventory

By Function: Transit or Pipeline Inventory (inventory in transit) Decoupling Inventory (inventory used to break the
linkage between two consecutive processing stages)

Buffer Inventory (to protect from price hikes,

uncertainties in demand & supply, etc.)

Cycle Inventory (to take advantage of quantity discounts

or EOQ)

By Nature
Raw materials / Work in-process / Finished goods / Spare parts & Supplies CRG @ AIM - Production Management
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Reasons for carrying Inventory

Service the customers with immediate & seasonal demands Protect against supply errors, shortages, stock-outs, poor forecasts, etc. Level production activities stabilize employment and improve labour relations Decouple successive stages in production process so that breakdowns do not stop the entire production run A means for attaining economy in purchasing Hedge against future price changes, strikes, etc.

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Dependent & Independent Inventory

Independent demand - the demand for item is independent of the demand for any other item in inventory Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory

Stock of Raw materials, Components & Sub-assemblies depends on the demand for the end item
Stock of finished products, spares, etc. directly related to the uncertain market environment
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Inventory Costs
1. Ordering / Set up Cost (cost of placing order,
inspection, changing or setting up facilities to produce inhouse)

2. Carrying / Holding / Storage Cost (cost of

infrastructure, handling, storage, security, insurance, etc.)

3. Purchase Cost (cost of materials)

Hence, Total Cost of Inventory = Ordering Cost + Carrying Cost + Cost of Material
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Classical Inventory Control System

Order quantity = Q

Usage rate Maximum inventory level Inventory level

Average inventory on hand Q 2

Minimum inventory 0

Time
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Important assumptions of Classical Inventory Model 1. Demand is known, constant, and independent 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete 4. Quantity discounts are not possible 5. Only variable costs are setup and holding 6. Stock-outs can be completely avoided
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Typical Inventory Control System

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Economic Order Quantity (EOQ)

The quantity ordered every time in order to minimize the total inventory costs Literally, its the quantity ordered to bring in economy to the cost center

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EOQ Diagrammatic Representation

Minimum total cost Annual cost Holding cost curve

Optimal order Order quantity (Q) CRG @ AIM quantity - Production Management
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Terms used in Inventory Control System

Costs of Inventory (OC, CC, COM) Annual Demand (D) Quantity ordered every time (EOQ: Q) Re-Order Level or Point (ROL / ROP): the level of stock at which a fresh purchase order is initiated; if not done at this point, it may lead to stock-out Lead Time (LT): Time gap between placing the ordering and receiving the material Lead Time Demand (LTD): Demand during the lead time Safety or Buffer Stock (SS): Stock maintained to manage the fluctuations in consumption (LTD) and / or lead time Stock-out: stock gets exhausted Back Order: Processing an order of the customer who is CRG @ AIM - Production Management willing to wait 25
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To derive an equation for EOQ

Let D be the demand / year, C be the Cost of Material / unit, Co be the Cost / Order, Cc be the Carrying Cost / unit / year, Q be the Quantity ordered or purchased every time, then Total Cost of Inventory = Ordering Cost + Carrying Cost + Cost of Material

Ordering Cost = No. of Orders x Cost / Order OC = D/Q x Co Carrying Cost = No. of units carried / year x Carrying cost / unit/year CC = (Q/2) x Cc Cost of Material = No. of Units purchased / year x Cost of Material / unit COM = D x C

TC(I) = [(D/Q) x Co] + [(Q/2) x Cc] + [D x C]

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Applying Maxima-Minima method: differentiate the TC(I) w.r.to Q; dTC/dQ = (-D x Co) /Q2 ) + (Cc/2) + 0 To check the second differential is whether less or greater than 0 D2 TC/dQ2 = (2DCo)/Q2 ) > 0 (+ve) Hence the value of Q will minimize the TC function To obtain the value of Q: Equate the first derivative to 0, (-DCo) /Q2 ) + (Cc/2) = 0 i.e. (-DCo) /Q2 ) = (Cc/2) i.e. Q2 = (- 2DCo) / (-Cc) i.e.

Q =

(2DCo/Cc)
CRG @ AIM - Production Management 2012

EOQ
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Inventory Control Systems

Continuous or Fixed Order-Quantity system (Q- system / Perpetual Inventory control system)
Whenever the on-hand stock level touches the predetermined point (ROP), a fresh order (Re-order)is placed

Periodic Fixed Order-Period System (P System)

At fixed intervals of time (weekly/ monthly, etc.), a fresh order is placed; quantity ordered is just sufficient to raise the stock level to the maximum inventory level; the order quantity differs each time

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Q-System
Order received Order received Order received Order received

On-hand inventory

OH ROP

OH

OH

Order placed L

Order placed L

Order placed
L

T1

T2

T3

Time
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P-System
Target stock level
Q4

Q2

On-hand inventory

Q1

Q3

P
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Quantity Discount (Price-break) Model

Reduced prices are often available when larger quantities are purchased Trade-off is between reduced product cost and increased holding cost E.g. Cost of Materials: Qty. (Units) Unit Price (Rs) > = 1000 15 1001 -1500 12.5 1501-2000 10 Decision on the Order quantity to be taken based on the total cost comparisons between the EOQ cost and Quantity Discount cost CRG @ AIM - Production Management
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Selective Inventory Control (SIC) Techniques

Sl. No. Analysis Basis Expansion

1
2 3 4 5

ABC
HML VED FSN SDE

Annual value of consumption

Unit price of the material Criticality of the Component Issue of Materials from stores Availability

Always Better Control

High, Medium & Low price Vital, Essential & Desirable Fast Moving, Slow Moving & NonMoving Scarcely available, Difficult to get & Easily available

6
7 8

SOS
GOLF MUSIC3D

Seasonality of Items
Source of purchase Combined advantages of ABC, VED & FSN analyses

Seasonal & Off-Seasonal

Govt., Local & Foreign Multi-Unit Selective Inventory Control 3-Dimensional analysis
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CRG @ AIM - Production Management 2012

Maintenance Management
Upkeep of machinery, equipment, tools and other productive facilities in order for the smooth production operations

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MAINTENANCE APPROACHES

Planned Maintenance

Unplanned Maintenance

Emergency / Breakdown
Maintenance
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PLANNED MAINTENANCE
Total Productive Maintenance (TPM)

Preventive Maintenance

Scheduled Maintenance

Condition Based Monitoring (CBM)

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Reliability
Reliability is the probability that a machine will function accurately or properly for a specified time Principle of Redundancy
Provide backup components to increase reliability

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Bath Tub Curve

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