A unit of Realwaves (P) Ltd

CHAPTER

1
Inventory is one of the most expensive & significant asset to many company, representing as
much as 40% of total invested capital. The inventory may consist of raw material, work in
progress, spare parts / consumable and finished goods.
It requires effective planning and control as a substantial share of funds is invested in them.
It block the working capital, which is so costly, it is not favorable to have a high level of
inventory.
Inventory required holding and maintenance cost. It carries the risk of spoilage, theft, and
leakage.
Thus, it is very essential to have a tight control over the level of inventory.

MODEL I: EOQ (with instantaneous supply)

EOQ is that size of order which minimize total annual cost of carrying inventory and cost of
ordering, when the size of order increase, the number of order to be place decrease thus the
ordinary cost will decrease, where the inventory carrying cost will increase.
Total cost

Cost (`) Carrying cost

Ordinary cost

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EOQ
Order size (Q)
EOQ = 2RO
C
R = annual requirement
O = ordering cost per order
C = carrying cost

INVENTORY CONTROL LEVELS

Under this technique various inventory control levels are fixed according to the terms of quantity
to ensure that optimum quantity of inventory is purchased and stored. The technique requires
fixation of stock control in respect of every type of inventory. The different limits fixed are:

(a) Re-order level: This level indicates the time to place order for inventory. It signifies the
action point for procuring the inventory. This level is fixed between the minimum and maximum
levels. The purpose of this level is to indicate time to place order so that stock is not reduced to a
level less than the minimum level.
The formula used for computing Re-order level (ROL) is as follows:

ROL = Maximum Consumption x Maximum Re-order Period

or
ROL = (Lead Time x Usage Rate per day) + Safety Stock.

(b) Maximum Level: This level indicates maximum quantity of inventory to be held at any time.
The quantity of inventory should not exceed this level. This is to minimize inventory-holding
costs.
The maximum level may be calculated by applying the following formula:
Maximum Level = Re-order Level + Re-order Quantity (Minimum Consumption x
Minimum Re-order Period)
or
Maximum Level = EOQ + Safety Stock.

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 A unit of Realwaves (P) Ltd

(c) Minimum Level: This level indicates minimum quantity of stock to be held at any time. This
is to avoid risk of dislocation of production process.
The minimum level can be calculated as follows:
Minimum Level = ROL (Normal consumption x Normal Re-order Period)

(d) Average Level: It is that level which should be maintained on an average in storehouse. The
formula used for calculating average stock level is as follows:

Average Stock Level = Maximum + Minimum Level

2
Illustration: 1
Ram purchases an item at the rate of ` 20 per piece from shyam. 2000 units of the item are
required per year. What should be the EOQ if the cost per order is 5 and inventory carrying cost
is 20% of purchase price.
Ans: EOQ = 70.71 & 71 unit

Illustration: 2
A dealer has to supply 200 unit of a product. He gets the product at ` 25 per unit from the
manufacture. The cost of ordering & transportation from the manufacture is ` 37.5 per order. The
cost of holding inventory is 7.5 % per year of the cost of product. Find EOQ & TC.
Ans: EOQ = 89.44 & 5167.7 unit
Illustration: 3
A raw material has a demand of 5000 units per year. The cost of one procurrent is ` 50 & the
holding cost per unit is ` 2.40 per year. Find EOQ & no. of order
Ans: EOQ = 456 unit, no. Of order = 10.96

Illustration: 4
Calculate EOQ & total cost (including purchase cost) from the following data:
Annual demand 2500 unit
Unit price ` 2.50
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 A unit of Realwaves (P) Ltd

Ordering cost ` 4.00 per order

Storage rate 1 % per year
Interest rate 12% per year
Obsolescence rate 7 % per year
Ans: EOQ = 200 unit, TC = 6350

Illustration: 5
A purchase manager place order each time for a lot of 500 unit of a particular item. From the
available data the following results are obtained.
Inventory carrying cost 40%
Ordinary cost per order ` 600
Cost per unit ` 50
Annual demand 1000 unit
Find out the loss to the organization due to the ordinary policy.
Ans: loss (66200- 54899) = 1301

Illustration: 6
The purchase manager of a company has collected the following data for one of the A class
items:
Interest on the lack up capital 20 %
Order processing cost (`) for each order ` 1000
Inspection cost per lot 500
Follow up cost for each order 800
Pilferage while holding inventory 5%
Other holding cost 15%
Other procurrent cost per order 1700
Annual demand 10000 units
Cost per item ` 100
Discount for a minimum order quantity of 1500 items is 10%. What should be the ordinary
policy of the purchase manager?
Ans: EOQ = 1414, TC = 1056568.5, EOQ = 1500, TC = 953667
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 A unit of Realwaves (P) Ltd

Illustration: 7
A company needs 1000 units annually of an article. The cost per article is ` 20. Order cost per
order is ` 25 and carrying cost is 25% of the cost of article per unit annually. If the company
orders 500 or more units than a discount of 5% is available, determine the most suitable solution.
Ans: EOQ = 100 unit, TC = 20500, EOQ = 500, TC = 20237.5

Illustration: 8
In a factory raw material A and B are used weekly as follows:
Normal Usage 150 kg
Maximum Usage .225 kg
Minimum Usage ..75 kg

Re-order Quantity A 1200 kg

B 1800 kg
Reorder Period A 4 to 6 weeks
B 2 to 4 weeks
Calculate for each raw martial:
(i) Reorder level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) Average stock level
Ans: (i) A = 1350units B = 900units (ii) A = 2250units B = 2550units (iii) A = 600units B =
450units (iv) A =1425units B =1500units

Illustration: 9
In a Company raw martial is used weekly as following:
Normal Usage 50 units
Minimum Usage 25 units
Maximum Usage 100 units
Reorder Quantity 300 units
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 A unit of Realwaves (P) Ltd

Reorder Period 1 to 3 weeks.

Determine the following:
(i)Reorder Level (ii) Minimum Level (iii) Maximum Level and (iv) Average Level
Ans: (i) 300 units (ii) 200 units (iii) 575 units (vi) 387.5 units

MODEL - II: EOQ model with shortage allowed (demand Rate uniform, production Rate
infinite)
In the previous inventory models, we have not permitted inventory shortages where there was
not sufficient stock to meet current demand. However, there are many situations in business that
suggest that planned shortages or stockouts may be permitted.
Formula:

EOQ = 2RO C + Cs
C Cs

S = EOQ C
C + Cs

T = EOQ/R

TC = TOC + TCC
TCC = EOQ xC C
2 C + Cs

M = EOQ - S
Cs = Cost of Back order (Shortage cost)
Where,
S = Optimum quanity of product to backorder (amount of backorder)
M = Maximum inventory level
T = Time between order
R = Annual requirement.

Illustration: 14

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 A unit of Realwaves (P) Ltd

A dealer suppliers you the following data relating to an item of inventory:

Annual demand = 2000 units.
Cost of unit = ` 50 per unit
Ordering cost = ` 25 per order
Holding cost = ` 10 per unit per year.
Back order cost = ` 30 per unit per year
Determine:
(i) EOQ
(ii) Maximum number of back order units
(iii) Maximum inventory level
(iv) Time between order
(v) Total annual variable costs.
Ans: (i) 115 units, (ii) 29 units (iii) 86 units (iv) 21 days (v) ` 866.

LAST YEAR QUESTIONS

YEAR 2011
(a) using data, obtain the EOQ and the total variable cost associated with the policy of EOQ.
Annual demand = ` 20000
Ordering cost = ` 150 per order.
Monthly inventory carrying cost = 2% of average inventory value.

YEAR 2009
A dealer supplies you the following information with regard to a product dealt in by him:
Annual demand: 10000 units; ordering cost: ` 10 per order; Price: ` 20per unit.
Inventory carrying cost: 20% of the value of inventory per year.
The dealer is considering the possibility of allowing some back order (stockout) to occur. He has
estimated that the annual cost of backordering will be 25% of the value of inventory.
(i) What should be the optimum number of units of the product he should buy in one lot?
(ii) What quantity of the product should be allowed to be back ordered, if any?
(iii) What would be the maximum quantity of inventory at any time of the year?

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 A unit of Realwaves (P) Ltd

(iv) Would you recommend to allow back-ordering? If so, what would be the annual cost saving
by adopting the policy of back- ordering.
Ans: EOQ = 223.6 units (stockout are not permitted), EOQ = 300 unit (backorder is permitted),
S = 133 units. M = 167 units, TC = ` 894.43 (stockout are not permitted), ` 666.67 (backorder is
permitted)

YEAR 2008
In an inventory system the cost of placing an order is ` 100/ order. The annual demand is 5000
units and the inventory carrying charge is 2% of the value of inventory per month. The item cost
is ` 75 each.
(i) Calculate EOQ and total system cost if shortage is not allowed.
(ii) If shortages are allowed to back logged at cost of ` 5 per unit short/month, determine EOQ,
maximum stock level, maximum backlog level and the total system cost.
Ans: (i) EOQ = 236, total cost = ` 37924 (ii) EOQ = 269, max backlog level = 62, max
inventory level = 197 units, total cost = ` 378721.

YEAR 2007
Given that:
(i) Annual usage 60 units
(ii) Procurement Cost ` 150 per order
(iii) Cost per piece ` 100
(iv) Inventory Carrying Cost 10%
(A percentage per period including insurance, taxes, obsolescence, etc)
Calculate Economic Order Quantity (EOQ)
Ans: EOQ = 42.42 units

YEAR 2006
A regional warehouse purchase hand tools from various suppliers and then distributed them on
demand to retailers in the region. The warehouse operates five days per week, 52 week per year.
Only when it is open can order be received. The following data are estimated for 3/8-inch hand
drills with double insulation and variable speed:
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 A unit of Realwaves (P) Ltd

Average daily demand = 100 drills

Standard deviation of daily demand () = 30 drills
Lead time (L) = 3 days
Holding cost (H) $ 9.40 units/year
Ordering cost (S) = $35/order
Cycle service level = 92%
[A 92 percent cycle service level corresponding to Z = 1.41 (as per Normal Distribution Table)]
Safety stock = ZL
The warehouse uses a continuous review () system.
(i) What order quantity, and reorder point R, should be used?
(ii) If on hand inventory is 40 units, there is one open order for 440 drills, and there are no back
order, should a new order be placed?
Ans: EOQ = 440, ROL = 373

YEAR 2005
XYZ Company buys in lots of 5 boxes, which is a 3-month supply. The cost per box is ` 125 and
the ordering cost is ` 150. The inventory cost is estimated at 20% of unit value.
(i) What is the total annual coat of the existing inventory policy?
(ii) How much money could be saved by employing the economic order quantity?
Ans: (i) 3162.5 (ii) EOQ = 16 units, total cost = 2887.5 saving when company follow EOQ
policy (3162.5 2887.5) = ` 275

*****

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 A unit of Realwaves (P) Ltd

CHAPTER

2
SQC techniques are based on the theory of probability and sampling and are being extensively
used in almost all industries such as armament, aircraft, automobile, textile, electrical equipment,
plastic, rubber, petroleum, transportation, chemical, medicine, and so on. In fact, it is impossible
to think of any industry field where SQC is not used.
The basic problem in any production process is not the quantum of the product but the
quality of the product. The producer is basically interested to see that the product is of acceptable
quality i.e., it conforms to certain prescribed standards or specifications. The quality of the
manufactured product depends on a number of factors, starting with its design and specifications,
the production process, the raw materials, machines and equipments, the expertise and skill of
the persons who handle them, and the inspection of the final product. For successful marketing
of the product, it is imperative that the end products must conform to the standards or
expectations laid down by the customers.

QUALITY CONTROL
The quality control is an activity, which assures that goods or services can form to specified
standards.

STATISTICAL QUALITY CONTROL

SQC is the application of quantitative techniques to determine how far the product conforms to
the standards of quality and precision and to what extent its quality deviated from the standard
quality. The purpose of statistical quality control is to discover and correct only those forces,
which are responsible for variations outside the stable pattern.
OBJECTIVES OF SQC
1. To assess the quality of the raw materials, semi finished goods and finished products at
various stages of production process.
2. To achieve better utilization of raw materials, more efficient utilization of equipment,

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 A unit of Realwaves (P) Ltd

etc.
3. To reduce the wastage of raw materials, men and machines during the process of
production.
4. To see whether the product conforms to the pre determined standards and
specifications and whether it satisfies the needs of the customers.
5. To take necessary corrective steps to maintain the quality of the manufactured
products.
6. To protect the manufacturers as well as the consumers against heavy losses due to a
rejection of large quantity of products.
Techniques of SQC

Process control Product control

(By control chart device) (By sampling inspection plan)

Variables Attributes Attributes Variables

X- chart R- chart
(Mean- (range chart)
chart)

C- chart Np- chart P- chart

(Defects per group) (No. Of defective) (proportion defective)

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 A unit of Realwaves (P) Ltd

PROCESS CONTROL
The main objective in any production process is to control and maintain a satisfactory quality
level for its product. It should be ensured that the product conforms to specified quality
standards, i.e; it should not contain a large number of defective items.

A TYPICAL CONTROL CHART

x point out of control

Upper control limit (UCL)
x Mean central line
x x x x x Lower control limit (LCL)
Quality scale variable / x x x
Attribute x x
. x .point out of control
1 2 3 4 5 6 7 8 9 10
Sample numbers or (batch serial numbers)

CONTROL CHARTS FOR VARIABLES

Control charts for variables are designed to achieve and maintain a satisfactory quality level for a
process whose product is amenable to quantitative measurements like the thickness, length or
diameter of a screw or nut, weight of the bolts, tensile strength of yarn or steel pipes, specific
resistance of a wire, etc.

I) MEAN CHART (X - CHART)

(a) When and standard deviation is known

1. Mu () = mean value of the population
= S. D of the population
Control limit (C.L) =

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 A unit of Realwaves (P) Ltd

2. Upper control limit (UCL) = + 3

n

3. Lower control limit (LCL) = 3

n

4. n = number of observations in the sample.

(b) When is unknown & standard deviation is known
CL = x x = x1 + x2 + x3 . xn
n
UCL = x + 3
n
LCL = x - 3
n

(c) When is known and is unknown

CL =
UCL = + 3 R
d2 n

= + A2 R (where A2 = 3 )
d2 n

LCL = 3R R = R1 +R2 + R3 . rk
d2 n k

= A2 R

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 A unit of Realwaves (P) Ltd

R = max min
k = no. of samples

(d) When and is unknown

CL = x (x double bar)

UCL = x + 3 R
d2 n

= x + A2 R

LCL = x3R = x A2 R
d2 n

CONTROL CHART FOR ATTRIBUTES

It can be observed only as attributes by classifying an item as defective or non defective i.e.,
conforming to specifications or not.

(A) PROPORTION DEFECTIVE CHART ( P CHART)

CL = P

UCL = P + 3 pq p = total no. of defectives

n total no. of pieces

LCL = P - 3 pq (q = 1 - P )
n

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 A unit of Realwaves (P) Ltd

(B) np CHART (number of defective)

CL = np
UCL = np + 3 npq

LCL = np 3 npq

(C) C CHART (defects per group)

CL = C
UCL = C + 3 C

LCL = C 3 C

II RANGE CHART ( R- CHART)

(a) When standard deviation is known
CL = d2
UCL = d2 + 3 d3
LCL = d2 3 d3
Where d2 & d3 are constant & their value given in question.

(b) When is unknown

CL = R
UCL = R + 3d3 R = R 1 + 3d3 = R D4
d2 d2

LCL = R - 3d3 R = R 1 3d3 = RD3

d2 d2

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 A unit of Realwaves (P) Ltd

Illustration: 1
The average diameter of the population of shafts was considered to be 1.5 inches with a standard
deviation of 0.02 inches. The sample of size 10 were taken. Construct the appropriate control
charts showing the central line and the two central limits.
Ans: CL = 1.5, UCL = 1.518, LCL = 1.482

Illustration: 2
Samples of size 100 were taken from mass produced product and the sample mean was found to
be 39 cm. It is known from past experience that it is reasonable to take 12 cm as the population
standard deviation. Draw a control chart for the sample mean.
Ans: CL = 39, UCL = 42.6, LCL = 35.4

Illustration: 3
In a factory 20 sample of 4 units each were taken. The population mean was found to be 20 cm.
And the sum of the ranges for 20 samples is 120 cms. Draw x chart when A2 = .73
Ans: CL = 20, UCL = 24.38, LCL = 15.62

Illustration: 4
In a factory 20 sample of 4 units each were taken. And the critical dimension was measure giving
x = 380cm & R = 120cm. Draw x chart and R chart when A2 = .73, D3 = 0, D4 = 2.282
Ans: CL = 19, UCL = 23.38, LCL = 14.62

Illustration: 5
A machine is set to deliver the packets of a given weight. Ten samples of size five each were
examined and the following results were obtained:
Sample no 1 2 3 4 5 6 7 8 9 10
Mean 43 49 37 44 45 37 51 46 43 47
Range 5 6 5 7 7 4 8 6 4 6
Calculate the values for the central line and the control limits for the mean chart and range chart.
Comment on the state of control. (Given for n = 5, d2 = 2.326, d3 = 0.864)
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 A unit of Realwaves (P) Ltd

Ans: CLx = 44.2, UCLx = 47.546, LCLx = 40.854, CLR = 5.8, UCLR = 12.263, LCLR = 0
(negative)

Illustration: 6
Construct a control chart for mean and the range for the following data on the basis of fuses,
samples of 5 being taken every hour each set of 5 has been arranged in ascending order of
magnitude.
A 42 42 10 36 42 51 60 18 15 69 64 61
B 65 45 24 54 51 74 60 20 30 109 90 78
C 75 68 80 89 57 75 72 27 39 113 93 94
D 78 72 81 77 59 78 95 42 62 118 109 109
E 87 90 81 84 78 132 138 60 84 153 112 136

Comment on whether the production seems to be under control.

A2 = .577 (given)
D3 = 0 (given)
D4 = 2.282 (given)
Ans: CLx =71.6, UCLx = X + A2R = 106.024, LCLx = 36.68, Revised Clx = 71.34, UCLx =
105.94, LClx = 36.74, CLR = 60.83, UCLR = 126.1809, LCLR = 0

Illustration: 7
15 samples of size 4 were drawn and the following measurements were made.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
A 32 42 25 22 29 30 34 11 11 36 34 27 16 25 10
B 20 36 15 33 30 34 31 21 22 30 16 36 35 36 28
C 33 52 52 34 27 26 28 20 28 35 37 51 32 37 14
D 6 50 63 23 31 16 34 16 31 26 26 53 37 24 13
Determine UCL, LCL for X chart & R - chart. (Given: A2 = .729, D3 = 0, D4 = 2.282)

Ans: CLx = 29.37, UCLx = 42.49, LCLx = 16.25, CLR = 18, UCLR = 41.076, LCLR = 0

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 A unit of Realwaves (P) Ltd

Illustration: 8
20 sample each of size 100 of glass vessels were inspect and the results of inspections are given
below:
Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
no
No. of 2 1 3 0 2 3 1 2 0 4 3 2 0 4 1 7 0 1 3 1
defectives
Drawing control chart for proportion defectives and no. of defective, plot the control limits &
find the deviation.
Ans: P-chart = CL = 0.02, UCL = .062, LCL = 0 (negative), np chart = CL = 2, UCL = 6.2,
LCL = 0

Illustration: 9
10 samples of different sizes were taken and the no. of defective in each samples are given
below:
Sample no 1 2 3 4 5 6 7 8 9 10
Sample size 100 300 200 150 200 250 300 150 100 250
No of defects 6 12 5 5 20 5 10 6 4 25
Draw a control chart for fraction defectives & find the deviations.
Ans: P- chart = CL = 0.049, UCL = 0.094, LCL = 0.004, np- chart = CL = 9.8, UCL = 18.958,
LCL = 0.642

Illustration: 10
The following table gives the no. of defects observe in 8 woolen carpets. Construct the control
chart for defects per group
Carpet no. 1 2 3 4 5 6 7 8
No. of defects 2 5 5 6 1 5 1 7
Ans: CL = 4, UCL = 10, LCL = 0
LAST YEAR QUESTIONS

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 A unit of Realwaves (P) Ltd

YEAR 2000
Ten samples of hourly production of a mass produced item are taken and the number of defective
of each sample are noted. On the basis of these data, obtained the 3- sigma control limits of the
control chart for defective proportion:

Sample Number Size Number of Defectives

1 148 7
2 160 6
3 155 8
4 156 8
5 161 5
6 167 9
7 164 8
8 160 8
9 156 7
10 173 10

Ans: P- chart = CL = .04742, UCL = .0978, LCL = 0, n = 160

YEAR 2001
In an initial study of a process, five samples were taken after every 30 minutes and the following
data was recorded for analysis.

Time Reading
8.00 am 1 2 3 4 5
8.30 am 65 70 65 65 85
9.00 am 75 85 75 85 65
9.30 am 75 80 80 70 75
10.00 am 50 70 70 75 65
10.30 am 70 75 65 85 80

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 A unit of Realwaves (P) Ltd

11.00 am 60 75 75 85 70
11.30 am 75 80 65 75 70
12.00 am 60 70 80 75 75
12.30 pm 80 75 90 50 80
1.00 pm 85 75 85 65 70
1.30 pm 70 70 75 75 70
2.00 pm 65 70 85 75 60
2.30 pm 90 80 80 75 85
3.00 pm 75 80 75 80 65
3.30 pm 75 70 85 70 80
4.00 pm 75 70 60 70 60
4.30 pm 65 65 85 65 70
5.00 pm 60 60 65 60 65
5.30 pm 50 55 65 80 80
6.00 pm 60 80 65 65 75
6.30 pm 80 65 75 65 65
7.00 pm 65 60 65 60 70
7.30 pm 65 70 70 60 65
8.00 pm 65 65 65 70 70
The constants are as follows:
A2 = 0.577, d2 = 2.326, D3 = 0, D4 = 2.114
Draw the control chart; calculate the control limits based on the chart and estimate the process
capability indices (Cp, Cpk values), use of graph paper is allowed to plot the chart.

Ans: CLx = 71.25, UCLx = 80.98, LCLx = 61.52, CLR = 16.87, UCLR = 35.66, LCLR = 0
(negative)

YEAR 2005
For the data given below, construct a stabilized p- chart. Is the process in control?

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 A unit of Realwaves (P) Ltd

Record of the number of defective parts in production process (sample size vary)

Sample number Sample size Number of Proportion

defective parts defective
1 95 8 .084
2 90 6 .067
3 100 9 .090
4 105 10 .095
5 105 8 .076
6 120 7 .058
7 115 14 .122
8 80 7 .088
9 90 9 .100
10 80 17 .213
11 90 12 .133
12 100 10 .100
13 100 8 .080
14 110 10 .091
15 130 6 .046
16 100 8 .080
17 110 9 .082
18 110 10 .091
19 90 20 .222
20 80 10 .125
2000 198
Ans: P- chart = CL = .099, UCL = .1886, LCL = .00942, n = 100

YEAR 2006
An inspection team has collected the following data during the quality control exercise in a
computer cabinet manufacturing unit:

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 A unit of Realwaves (P) Ltd

Observed dimensions (in cms)

Samples 1 2 3 4 5 6
1 3.56 3.49 3.48 3.51 3.50 3.53
2 3.50 3.50 3.52 3.53 3.49 3.47
3 3.49 3.54 3.55 5.54 3.49 3.48
4 3.55 3.52 3.52 3.50 3.51 3.52
5 3.49 3.48 3.49 3.49 3.53 3.54
6 3.48 3.47 3.53 3.54 3.55 3.53
Work out the control chart for the observations so obtained.
Where d2 = 2.53, d3 = 0.848, D4 = 2.004, D3 = 0

Ans: CLx = 3.57, UCLx = 3.763, LCLx = 3.377, CLR = 0.398, UCLR = 0.798, LCLR = 0
(negative)

YEAR 2007
Find out UCL and LCL of P-chart from table I and UCL and LCL of C-chart from table II.

Table I (P chart)
Date No. of pieces No. of defective pieces (b) Fraction defective
inspected (a) (b) / (a)
November 4 300 25 0.0834
5 300 30 0.1000
6 300 35 0.1167
7 300 40 0.1333
8 300 45 0.1500
10 300 35 0.1167
11 300 40 0.1333
12 300 30 0.1000
13 300 20 0.0666
14 300 50 0.1666

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 A unit of Realwaves (P) Ltd

10 3000 350

Table II (C- chart)

Casting no. No. of defect found on inspection (C)

1 2
2 4
3 1
4 5
5 5
6 6
7 3
8 4
9 0
10 7
Total 10 37
Based on P and C chart state whether the process are under control

*****

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 A unit of Realwaves (P) Ltd

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