INVENTORY MANAGEMENT

Inventory is an unused asset, which lies in stock without participating in value adding process. Inventory can be classified as supplies, raw materials, work-in-process and finished goods which are essential to a businesses operations. Inventory management depends heavily on sales because inventory is purchased earlier than sales can be made and poor inventory levels leads to either lost sales or excessive carrying costs. Any changes in the products demand should be worked into the companys purchasing and manufacturing schedules thus coordination among the sales, purchasing, production and finance departments is important. Unused equipment, raw material, WIP and Finished goods, consumables, spare parts, bought out parts, tools and tackles, gauge and fixtures etc. In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M, WIP, Bought out parts and Finished goods] as against a few days in Japan and a month in the US and Europe If we look around in our facilities we find stocks lying unused for years catching dust and rust in the form of plant and equipment, raw material, WIP and Finished goods. In our country inventory is always viewed as asset , in fact, though it is called an asset, it is a big liability Reluctance to scrap useless inventory on time is one of the reasons why we carry huge stocks Inventory is biggest source of waste

IMPORTANT TERMS IN LOGISTICS

Minimum Level It is the minimum stock to be maintained for smooth production. Maximum Level It is the level of stock, beyond which a firm should not maintain the stock. Inventory Level It is the actual inventory quantity held at a logistical facility at a particular point of time. Reorder Level The stock level at which an order should be placed.It is the predecided inventory level ,which is reached by a falling inventory level during utilisation of inventory ,at which point an order is placedfor replenishing the inventory in order to avoid a stockout Safety Stock Stock for usage at normal rate during the extension of lead time.It is the inventory quantity held due to differences in demand & supply rate of material at each stage in between supplier,purchase,manufacture,distribution & customer to avoid stockouts at each stage. Reserve Stock - Excess usage requirement during normal lead time. Buffer Stock Normal lead time consumption Seasonal stock refers to the materials which is purchased or manufactured in anticipation of seasonal demand. Speculative stock is the additional stock purchased as a hede against the possibility of future increase in price of the material. Dead stock is unused or obsolete stock which cannot be sold.

Lead time or Replenishment time :- It is the time elapsed between order placement and order receipt for an inventory item. In case inventory is to be replenished by manufacturing ,this is the time elapsed between the work order issued for manufacturing and the completion of manufacturing.

OBJECTIVES OF INVENTORY CONTROL

To meet unforeseen future demand due to variation in forecast figures and actual figures. To average out demand fluctuations due to seasonal or cyclic variations. To meet the customer requirement timely, effectively, efficiently, smoothly and satisfactorily. To reduce loss due to changes in prices of inventory items. To meet the time lag for transportation of goods. To meet the technological constraints of production/process. To smoothen the production process. To facilitate intermittent production of several products on the same facility. To gain economy of production or purchase in lots. To balance various costs of inventory such as order cost or set up cost and inventory carrying cost. To balance the stock out cost/opportunity cost due to loss of sales against the costs of inventory. To minimize losses due to deterioration, obsolescence, damage, pilferage etc. To stabilize employment and improve lab our relations by inventory of human resources and machine efforts. NATURE OF INVENTORY Dependent demand- Demand for one product is linked with demand for another product. These are items that are typically subassemblies or component parts that will be used in the production of a final or finished product. Subassemblies and component a part is derived from the number of finished units that will be produced. Example: Demand for wheels for new cars. Independent demand- Demand for a product/ service occurs independently of demand for any other for any other product or service, such as finished product, service parts, lubricants, cutting oil, greases, preservatives etc. These are items that are the finished goods or other end items. These items are sold or at least shipped out rather than used in making another product.

Symptoms of Poor Inventory Management

An increase in the number of backorders, indicating too many stock outs Rising inventory investment High customer turnover An increasing number of cancelled orders Insufficient storage space too much inventory on hand An increase in the volume and value of obsolete products Low Inventory Turn Over Ratio [about 50 is a good ratio] working capital problems

Functions of Inventory
Functions of Inventory
1. To meet anticipated customer demand. These inventories are referred to as anticipation stocks because they are held to satisfy planned or expected demand. 2. To smooth production requirements. Firms that experience seasonal patterns in demand often build up inventories during off-season to meet overly high requirements during certain seasonal periods. Companies that process fresh fruits and vegetable deal with seasonal inventories 3. To decouple operations. The buffers permit other operations to continue temporarily while the problem is resolved. Firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations from manufacturing disruptions. 4. To protect against stock-outs . Delayed deliveries and unexpected increases in demand increase the risk of shortages. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of anticipated demand. 5. To take advantage of order cycles. Inventory storage enables a firm to buy and produce in economic lot sizes without having to try to match purchases or production with demand requirements in short run. 6. To hedge against price increase . The ability to store extra goods also allows a firm to take advantage of price discounts for large orders. 7. To permit operations. Production operations take a certain amount of time means that there will generally be some work-in-process inventory.

Categories of Inventory
`Anticipation built in anticipation of future demand during peak season, strike,
promotioninal activities etc `Fluctuation (safety) to cover random, unpredictable fluctuations in supply and demand and lead time to prevent disruption in operations, deliveries etc

`Lot-size to take advantage of quantity discounts,reduce shipping, set up and clerical costs also called cycle stock `Transportation pipeline or movement inventories to cover the time needed to move from one point to another factory to distribution point for example `Hedge for materials where prices are volatile `Maintenance, repair and operating supplies (MRO) to support M and O spare parts, lubricants,consumables etc

Types of Inventory
Manufacturing: 1) Raw materials The valuation of raw materials inventory depends on the cost of acquiring raw materials & the pricing of RM issued for production. 2) components 3) WIP :-Inventory in between processing stages is called as work in process.The valuation depends on the manner in which fixed overhead costs are treated. F/G This is the inventory of the salable product made & duly packed which is ready to be sold to customer Wholesale inventory: Wholesalers stock large quantities and sell in small quantities to retailers. Products with seasonal demand, products to satisfy assorted, small and urgent needs of retailers are stocked. As the product line expands risk of retailers increases and the risk becomes wider and deeper. Retail inventory: retailers stock variety of products to satisfy demand. But they push the volume backwards to wholesalers and reduce the depth of risk although the risk is wide MRO: Maintenance, repairs and operating supplies. Location inventory: inventory at a fixed location Pipeline Inventory :It is inventory that is in the process of moving from one location in the supply chain to another. It consists of inventory movement from supplier to manufacturer,from manufacturer to distributor,from distributor to retailer & from retailer to customer. It consists of orders that have been placed but not yet received.

BENEFITS OF INVENTORY CONTROL

Ensures an adequate supply of materials Minimizes inventory costs Facilitates purchasing economies

Eliminates duplication in ordering Better utilization of available stocks Provides a check against the loss of materials

Requirements for Effective Inventory Management

To be effective, management must have the following: 1. A system to keep track of the inventory on the hand on order. 2. A reliable forecast of demand that includes an indication of possible forecast error. 3. Knowledge of lead times and lead time variability. 4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. 5. A classification system for inventory items.

TYPES OF INVENTORY COSTS

1) ORDERING COSTS It is the cost of ordering the item and securing its supply. IncludesExpenses from raising the indent Purchase requisition by user department till the execution of order Receipt and inspection of material They are the costs that vary with the actual placement of an order. These include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage. Ordering costs are generally expressed as a fixed Rupee amount per order, regardless of order size. When a firm produces its own inventory instead of ordering it from a supplier, the costs of machine setup (e.g., preparing equipment for the job by adjusting the machine, changing cutting tools) are analogous to ordering costs; that is, they are expressed as a fixed charge per production run, regardless of the size of the run. 2) INVENTORY CARRYING COSTS Costs incurred for holding the volume of inventory and measured as a percentage of unit cost of an item. It includesCapital cost Obsolescence cost Deterioration cost Taxes on inventory Insurance cost Storage & handling cost

They also include opportunity costs associated with having funds which could be used elsewhere tied up in inventory. Note that it is the variable portion of these costs that is pertinent. The significance of the various components of holding cost depends on the type of item involved, although taxes, interest, and insurance are generally based on the dollar value of the inventory. Items that are easily concealed (e.g., pocket cameras, transistor radios, calculators) or fairly expensive (cars, TVs) are prone to theft. Fresh seafood, meats and poultry, produce, and baked goods are subject to rapid deterioration and spoilage. Daily products, salad dressings, medications, batteries, and film also have limited shelf lives. Holding costs are stated in either of two ways: as a percentage of unit price or as a dollar amount per unit. In any case, typical annual holding costs range from 20 percent to 40 percent of the value of an item. In other words, to hold a Rs100 item for one year could cost from Rs 20 to Rs 40.

3) OUT-OF-STOCK COSTS It is the loss which occurs or which may occur due to non availability of material. It includesBreak down/delay in production Back ordering Lost sales Loss of service to customers, loss of goodwill, loss due to lagging behind the competitors, etc. Out of stock costs result when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer good will, late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for internal use (e.g., to supply an assembly line), the cost of lost production or downtime is considered a shortage cost. Such cost can easily run into hundreds of dollars a minute or more. Shortage costs are sometimes difficult to measure, and they may be subjectively estimated.

4) OTHER COSTS Capacity Costs Over-time payments Lay-offs & idle time Set-up Costs Machine set-up Start-up scrap generated from getting a production run started Over-stocking Costs Excess material lies without being used in time.

Types of Classification
` ABC category
A-B-C Approach classifies inventory items according to some measure of importance, usually annual dollar usage, and then allocates control efforts accordingly.

Three Classes of Items Used: A (very important) B (moderately important) C (least important) The key questions concerning cycle counting for management are: 1. How much accuracy is needed? 2. When should cycle counting be performed? 3. Who should do it? The first step in determining an inventory situation is to use a technique called ABC analysis. It is an inventory control method based upon a statistical principle discovered by a 19th century economist, Vilfredo Pareto. He observed that a small number of situations in a population would often dominate the results achieved. Therefore, controlling the vital few would go a long way to controlling the whole. This observation is known as the Management Principle of Materiality and is recognized today as Paretos Law. When ABC analysis is applied to an inventory situation, it determines the importance of items and the level of controls placed on the item. By dividing a companys inventory into different classifications A, B, C; managers can focus on the items that account for the majority of the inventory. The adaptation of Paretos Law of the vital few and trivial many follows a pattern:

A inventory accounts for about 20% of the items and 80% of the dollar usage B inventory accounts for about 30% of the items and 15% of the dollar usage C inventory accounts for about 50% of the items and 5% of the dollar usage

These percentages are approximate and vary from company to company. Normally the classifications are based upon annual dollar usage, but other criteria can be used, such as transaction usage, unit cost, lead time, and others. The steps in doing the ABC analysis are: determine annual quantity usage of each item, multiply the annual quantity usage by the cost of the item to get the total annual dollar usage, add the total dollar usage of all items to get aggregate annual dollar inventory expenditure, divide the total dollar usage of each item by the aggregate

inventory expenditure to reach the percentage of total usage for any item, list the in rank order by percentage of aggregate usage, and review annual usage distribution and classify items as A, B, or C. When doing an ABC classification, separate analysis should be performed for different types of inventory. ABC analysis provides the means for identifying those items that make the largest impact on a companys overall inventory cost performance. Different controls are used for each classification to improve inventory performance. A items have tighter controls on inventory records and more frequent reviews of forecasting, demand requirements, order quantities, safety stocks, and cycle counts. B items have similar controls to A items but reviews are less frequent. C items have the simplest controls. They are only important if there is a shortage of one of them. Thus, C items can be ordered in larger quantities and have higher safety stocks. ABC analysis puts emphasis on where the value is. By focusing efforts on higher value inventory, a company can assign proper resources to attain the optimum inventory levels, reducing inventory costs, and ensuring customers needs are met.

HML - high, medium, low similar Items are classified into three groups labeled as High Medium Low. The HML analysis is very similar to the ABC Analysis, the difference being instead of usage value, the price criterion is used. In their classification, the items used by the company are arranged in descending orders of their unit price. After this, the management of the company uses its discretion and judgment to decide the cut off lines for deciding the three categories. For example, the management may decide that all items of unit price value above Rs 500 should be categorized as H items, items whose, unit price falls between Rs 50 and Rs 500 should be categorized as M items and items whose unit price falls below Rs 50 should be categorized as L items. The categorization therefore is decided by the management. HML analysis helps an organization to take decisions on the following: a) It helps to assess the security requirements and the type of storage for high priced items. For example, expensive ball bearings can be kept under lock and key in a cupboard.

b) The frequency of stock checking is decided on the basis of the cost item. In other words, more expensive the item, more frequent will be its stock-checking. c) A control on purchases and buying policies can be exercised by the company. This means H and M items will not be ordered in excess of the required minimum quantity. However, in the case of L items, they may be purchased in bulk in order to avail the benefits of bulk purchase.

`FSND fast moving, slow moving, non-moving, dead spare parts Is based on the consumption figures of the items. The items under this analysis are classified into three groups: F (fast moving), S (slow moving) and N (non-moving). To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account and the period, usually in terms of number of months, that has elapsed since the last movement is recorded. Helps Identify active items which require to be reviewed regularly Surplus items whose stocks are higher than their rate of consumption; and Non-moving items which are not being consumed. SDE scarce, difficult, easy to obtain procurement /Spares S-D-E stands for Scarce, Difficult and Easy. It attempts to classify items on the basis of its availability or procurement such as

a) b) c)

Its non-availability. How scarce it is. Does it have a longer lead time ?

d) Where is the geographical location of the suppliers of the item, i.e. close by, or very far away. e) How reliable (or unreliable) ,after the suppliers of the item, etc.

Scarce: These are generally short in supply, or are channelized through government agencies. If the company feels that a lot of time as well as expenditure is involved in procuring these items, it would be advisable for the company to procure these items, say once a year. Difficult: These items are available indigenously, but are difficult to procure. Difficult categorization also includes those items which are procured from far off places and whose suppliers cannot be relied upon. Sometimes it may happen that certain items are difficult to manufacture and further, there may be only one or two companies who manufacture this item. In order to procure such items in time for production, the manufacturers may have to be given an order well in advance. Such items are also classified under difficult Category. Easy: As the name suggests, these items are easily and readily available. They include all those items that are produced according to commercial standards, items which are able to be procured locally without any difficulty, etc

GOLF govt, ordinary, local, foreign source procurement / Spares G-NG-LF Analysis, or also called GOLF Analysis, categorizes items based on the nature of suppliers. The nature is fixed or determined on the basis of quality of suppliers, lead time of supply, terms of payment, continuity and regularity of supply, extent of administrative work involved in the procurement, etc. The analysis classifies items into four broad groups G, NG (O), L and F. it is similar to the grouping made under the SIDE analysis.

G group covers all those items which are procured from government suppliers, namely State trading Corporation. Minerals and Metal Trading Corporation (MMTC) and various public sector undertakings. The procurement transactions with these category of suppliers

normally involves a long lead time. Many times these suppliers demand payment for goods in advance.

NG (which is represented by the letter 0 in the word GOLF) comprises of all those items which are procured from various Non-Government, or, Ordinary suppliers. Transactions pertaining to purchase of items under this category involve purchase from those suppliers who deliver goods in a moderately reasonable time. Further, the suppliers also offer credit which may range from to 45 days.

L group consists of those items which are purchased from local suppliers. These items generally consist of cash purchases. F group consists of items purchased from foreign suppliers the transactions with such suppliers involve the following: a) There is a lot of administrative and paper work involved before the actual delivery of goods takes place. b) The company may have to search for reliable foreign suppliers.

c) Opening of letters of credit, procuring necessary bank guarantees etc. will have to be obtained. d) The company may have to make necessary arrangements for shipping, port clearance and transport.

VED vital, essential, desirable spare parts / FG`

VED Analysis attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The analysis classifies items on the basis of their criticality for the industry or company. Vital: Vital category items are those items without which the production activities or any other activity of the company, would come to a halt, or at least be drastically affected. Essential: Essential items are those items whose stock out cost is very high for the company. Desirable: Desirable items are those items whose stock-out or shortage causes only a minor disruption for a short duration in the production schedule. The cost incurred is very nominal. VED Analysis is very useful to categorize items of spare parts and components. In fact, in the inventory control of spare parts and components it is advisable, for the organization to use a combination of ABC and VED Analysis. Such control system would be found to be more effective and meaningful. SOS seasonal, off-seasonal commodity The letter S stands for seasonal, and the letters OS stand for off seasonal. SOS analysis deals with the availability or purchase of items during season, or during Off-season. Items which are required to be purchased are normally identified as follows: a) Specific seasonal items which are available only for a limited period of time. For example agricultural products like raw mangoes, certain raw materials for cigarette and paper industries etc. Since such items are available only for a limited period of time, they are procured and stored to last till the next season. b) Many items are seasonal but they are normally available throughout the year. However, the purchase price of these items is generally lower during the harvest time. Because of this, the company has to predetermine the quantity of these items to be purchased. In other words, the company has to compare the cost savings accrued due to purchase of the items when the price is lower against the inventory carrying costs for the remaining part of the year.

c) Non-seasonal items pertain to those items, which a company requires to procure when they are not in season. The reason for this may be that the company found it very expensive and non-profitable to purchase and stock these items in bulk when they were available during the season.

JUST IN TIME Just In Time (JIT) is a production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand. When Companies use Just in Time (JIT) manufacturing and inventory control system, they purchase materials and produce units only as needed to meet actual customers demand. In just in time manufacturing system inventories are reduced to the minimum and in some cases are zero. JIT approach can be used in both manufacturing and merchandising companies. It has the most profound effects, however, on the operations of manufacturing companies which maintain three class of inventories-raw material, Work in process, and finished goods. Traditionally, manufacturing companies have maintained large amounts of all three types of inventories to act as buffers so that operations can proceed smoothly even if there are unanticipated disruptions. Raw materials inventories provide insurance in case suppliers are late with deliveries. Work in process inventories are maintained in case a work station is unable to operate due to a breakdown or other reason. Finished goods inventories are maintained to accommodate unanticipated fluctuations in demand. While these inventories provide buffers against unforeseen events, they have a cost. In addition to the money tied up in the inventories, expert argue that the presence of inventories encourages inefficient and sloppy work, results in too many defects, and dramatically increase the amount of time required to complete a product. Just-In-Time Concept: Under ideal conditions a company operating at JIT manufacturing system would purchase only enough materials each day to meet that days needs. Moreover, the company would have no goods still in process at the end of the day, and all goods completed during the day would have been shipped immediately to customers. As this sequence suggests, "justin-time" means that raw materials are received just in time to go into production, manufacturing parts are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers. Although few companies have been able to reach this ideal, many companies have been able to reduce inventories only to a fraction of their previous level. The result has been a substantial reduction in ordering and warehousing costs, and much more efficient and

effective operations. In a just in time environment, the flow of goods is controlled by a pull approach. The pull approach can be explained as follows. At the final assembly stage a signal is sent to the preceding work station as to the exact amount of parts and materials that would be needed over the next few hours to assemble products to fill customer orders, and only that amount of materials and parts is provided. The same signal is sent back to each preceding workstation so a smooth flow of parts and materials is maintained with no appreciable inventory buildup at any point. Thus all workstations respond to the pull exerted by the final assembly stage, which in turn respond to customer orders. As one worker explained, "Under just in time system you don't produce any thing, any where, for any body unless they ask for it some where downstream. Inventories are evil that we are taught to avoid". The pull approach described above can be contrasted to the push approach used in conventional manufacturing system. In conventional system, when a workstation completes its work, the partially completed goods are pushed forward to the next work station regardless of whether that workstation is ready to receive them. The result is an unintentional stockpiling of partially completed goods that may not be completed for days or even weeks. This ties up funds and also results in operating inefficiencies. For one thing, it becomes very difficult to keep track of where every thing is when so much is scattered all over the factory floor. An other characteristics of conventional manufacturing system is an emphasize on "keeping every one busy" as an end on itself. This inevitably leads to excess inventories particularly work in process inventories. In Just in time manufacturing, the traditional emphasize of keeping everyone busy is abandoned in favor of producing only what customers actually want. Even if that means some workers are idle. JIT in Inventory Management It is an inventory strategy which increases the return on investment by reducing inventory and associated carrying cost. It is the minimum inventory that is necessary to keep a system perfectly running. It sees inventory as waste and focuses on having the right material, at the right time, in the right place and in the exact amount i.e. inventory items arrive at the moment they are needed. To achieve JIT inventory, Managers should Reduce the Variability Caused by some Internal and External Factors i.e. by reducing required inventory. It includes (1) Elimination of Waste, (2)Small Batch/Lot size- Synchronized Manufacturing (3) Inventory reduction (4)vendor management. It assumes a level of input price stability. It assumes quality of inputs to remain constant. Assumes stable demand to ensure efficient capitalization. Lower stock holding means a reduction in storage space which saves rent and insurance costs. As stock is only obtained when it is needed, less working capital is tied up in stock .

There is less likelihood of stock perishing, becoming obsolete or out of date . Avoids the build-up of unsold finished product that can occur with sudden changes in demand. Less time is spent on checking and re-working the product of others as the emphasis is on getting the work right first time .

Poka Yoke Kanban Vendor Managed Inventory

Just In Time Techniques

POKA YOKE Poka Yoke is a quality management concept developed by a Matsushita manufacturing engineer named Shigeo Shingo to prevent human errors from occurring in the production line. Poka yoke (pronounced poh-kah yoh-kay) comes from two Japanese words yokeru which means to avoid, and poka which means inadvertent errors. Thus, poka yoke more or less translates to avoiding inadvertent errors. Poka yoke is sometimes referred to in English by some people as fool-proofing. However, this doesnt sound politically correct if applied to employees, so the English equivalent used by Shingo was "error avoidance." Other variants like mistake proofing or fail-safe operation have likewise become popular. The main objective of poke yoke is to achieve zero defects. In fact, it is just one of the many components of Shingos Zero Quality Control (ZQC) system, the goal of which is to eliminate defective products. Poka yoke is more of a concept than a procedure. Thus, its implementation is governed by what people think they can do to prevent errors in their workplace, and not by a set of step-by-step instructions on how they should do their job. Poka yoke is implemented by using simple objects like fixtures, jigs, gadgets, warning devices, paper systems, and the like to prevent people from committing mistakes, even if they try to! These objects, known as poka yoke devices, are usually used to stop the machine and alert the operator if something is about to go wrong. Anybody can and should practice poka yoke in the workplace. Poke yoke does not entail any rocket science - sometimes it just needs common sense and the appropriate poka yoke device. Poka yoke devices should have the following characteristics: 1) useable by all workers; 2) simple to install; 3) does not require continuous attention from the operator (ideally, it should work even if the operator is not aware of it); 4) low-cost; 5) provides instantaneous feedback, prevention, or correction. A lot of Shingo's poka yoke devices cost less than $50!

Of course, error-proofing can be achieved by extensive automation and computerization. However, this approach is expensive and complicated, and may not be practical for small operations. Besides, it defeats the original purpose of poka yoke, which is to reduce defects from mistakes through the simplest and lowest-cost manner possible. Poka yoke is at its best when it prevents mistakes, not when it merely catches them. Since human errors usually stem from people who get distracted, tired, confused, or demotivated, a good poka yoke solution is one that requires no attention from the operator. Such a poka yoke device will prevent the occurrence of mistake even if the operator loses focus in what she is doing. Examples of 'attention-free' Poke Yoke solutions: 1) a jig that prevents a part from being misoriented during loading 2) non-symmetrical screw hole locations that would prevent a plate from being screwed down incorrectly 3) electrical plugs that can only be inserted into the correct outlets 4) notches on boards that only allow correct insertion into edge connectors 5) a flip-type cover over a button that will prevent the button from being accidentally pressed Three levels of Poka-Yoke: 1) elimination of spills, leaks, losses at the source or prevention of a mistake from being committed 2) detection of a loss or mistake as it occurs, allowing correction before it becomes a problem 3) detection of a loss or mistake after it has occurred, just in time before it blows up into a major issue (least effective). KANBAN Kanban literally meaning "signboard" or "billboard," is a concept related to lean and just-in-time (JIT) production. According to its creator, Taiichi Ohno, Kanban is one means through which JIT is achieved.[2][3] Kanban is not an inventory control system; it is a scheduling system that helps determine what to produce, when to produce it, and how much to produce. The need to maintain a high rate of improvement led Toyota to devise the Kanban system. Kanban became an effective tool to support the running of the production system as a whole. In addition, it proved to be an excellent way for promoting improvements because reducing the number of Kanban in circulation highlighted problem areas.[4]

In the late 1940s, Toyota started studying supermarkets with the idea to apply store and shelf-stocking techniques to the factory floor, based on the theory that in a supermarket, customers get what they need at the needed time and in the needed amount. Furthermore, the supermarket stocks only what it believes it will sell, and customers take only what they need because future supply is assured. This observation led Toyota to view a process as being a customer of preceding processes, and the preceding processes as a kind of store. The customer process goes to the store to get needed components, and the store restocks. Originally, as in supermarkets, signboards were used to guide "shopper" processes to specific restocking locations. Kanban uses the rate of demand to control the rate of production, passing demand from the end customer up through the chain of customer-store processes. In 1953, Toyota applied this logic in their main plant machine shop.

Operation
An important determinant of the success of production scheduling based on "pushing" the demand is the quality of the demand forecast that can receive such "push." Kanban, by contrast, is part of an approach of receiving the "pull" from the demand. Therefore, the supply or production is determined according to the actual demand of the customers. In contexts where supply time is lengthy and demand is difficult to forecast, the best one can do is to respond quickly to observed demand. This difficulty is exactly what a Kanban system can help with: it is used as a demand signal that immediately propagates through the supply chain. This can be used to ensure that intermediate stocks held in the supply chain are better managed (usually smaller). Where the supply response cannot be quick enough to meet actual demand fluctuations (causing significant lost sales), stock building may be deemed as appropriate, which can be achieved by issuing more Kanban. Taiichi Ohno states that to be effective, Kanban must follow strict rules of use (Toyota, for example, has six simple rules, below) and that close monitoring of these rules is a never-ending task to ensure that the Kanban does what is required.

Kanban cards
Kanban cards are a key component of Kanban that uses cards to signal the need to move materials within a manufacturing or production facility or move materials from an outside supplier to the production facility. The Kanban card is, in effect, a message that signals depletion of product, parts, or inventory that when received will trigger the replenishment of that product, part, or inventory. Consumption drives demand for more. Demand for more is signaled by Kanban card. Kanban cards therefore help to create a demand-driven system. It is widely espousedby proponents of lean production and manufacturing that demand-driven systems lead to faster turnarounds in production and lower inventory levels, helping companies implementing such systems to be more competitive.

Kanban cards, in keeping with the principles of Kanban, should simply convey the need for more materials. A red card lying in an empty parts cart would easily convey to whomever it would concern that more parts are needed. In the last few years, systems that send Kanban signals electronically have become more widespread. While this trend is leading to a reduction in the use of Kanban cards in aggregate, it is still common in modern Lean production facilities to find widespread usage of Kanban cards. In Oracle ERP, Kanban is used for signalling demand to vendors through e-mail notifications. When stock of a particular component is depleted by the quantity assigned on Kanban card, a "Kanban trigger" is created (which may be manual or automatic), a purchase order is released with predefined quantity for the vendor defined on the card, and the vendor is expected to dispatch material within lead time.

Toyota's six rules

Do not send defective products to the subsequent process The subsequent process comes to withdraw only what is needed Produce only the exact quantity withdrawn by the subsequent process Level the production Kanban is a means to fine tuning Stabilize and rationalize the process.

Vendor Managed Inventory VMI is a supply chain practice where inventory is monitored, planned and managed by the vendor based on forecasted demand and agreed upon minimum and maximum inventory levels. It is used in following Error sensitive industries Multiple outlets and FMCG industries Perishable Goods Valuable and unpredictable components Strong competition and small operating margins Lower inventory levels, less overall overhead costs, increased sales and less human data entry errors. Improved communication between all channels, builds integrated logistical system. Reduced replenishments lead time, less inventory obsolescence, reduced stock outs. Extensive use of data sharing, completely dependent upon strong relationships and lack of trust or ineffective implementation can result in Inventory imbalances Inventory invisibility

One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed. This removes the need for the customer to have significant safety stock. Lower inventories for the customer can lead to significant cost savings. The customer also can benefit from reduced purchasing costs. Because the vendor receives data and not purchase orders, the purchasing department has to spend less time on calculating and producing purchase orders. In addition, the need for purchase order corrections and reconciliation is removed which further reduces purchasing costs. Cost saving can also be found in reduced warehouse costs. Lower inventories can reduce the need for warehouse space and warehouse resources. The manufacturer can gain some benefits from vendor managed inventory as they can gain access to a customers point of sale (POS) data makes their forecasting somewhat easier. Manufacturers can also work their customers promotional plans into forecasting models, which means enough stock will be available when their promotions are running. As a manufacturer has more visibility to their customers inventory levels, it is easier to ensure that stock-outs will not occur as they can see when items need to be produced.

JIT II

It is an extension of the JIT concept to the purchasing function by having a representative of the supplier located at the buying organisation facility. The relation with vendor will be dictated by following facts :Initially a restricted access to be given Confidential information about competitors will not be shared and so as other sensitive information. Access to necessary documents is ensured Over a period of time , the restriction will be minimized to reach the full potential of JIT II approach This should be a perpetual relationship between the Manufacturer and the supplier This enhances the relationship with the supplier ,results in enhanced Flexibility Profits Innovative capability Better products to get competitive edge in the market

Methodology of JIT II Maintaining Fair prices There should be a constant check in the market about the price. Innovation from the supplier side should be given due weightage Flexibility and quality of the product should be included while comparing the price. Tracking the market price for the products supplied by vendors (could be performed by corporate procurement) Suppliers are selected based on the check list containing all the necessary conditions Rank the vendors based on past performance, technology capability, quality etc. Ensure Vendor commitment to the program Set an evaluation period to understand the improvement in performance Finalize the vendor that provided maximum benefits After due consideration about the product quality and quantity they produce one vendor is chosen A representative from the vendor should be seated in the manufacturing facility to ensure JIT II approach is maintained Material Requirement Planning (MRP 1) For a manufacturing company to produce end items, the availability of sufficient production capacity must be coordinated with the availability of all raw materials and purchased items from which the end items are to be produced. In other words, there is a the availability of dependent demand items from which the products are made one approach to manage the availability of dependent-demand items is to keep a high stock of all the items that might be needed to produce the end item. However, this approach is costly due to the excessive inventory of components, fabricated parts and sub assemblies to ensure high service, level.

An alternative approach to managing dependent demand items is to plan for procurement of specific components that will be required, to produce the required quantities of the end products as per the production schedule indicated by the master production schedule. Such a technique is known as Materials Requirements Planning technique.

MRP I is a computer based in which the given Master Production Schedule is divided into the required amounts of raw materials, parts and sub assemblies, needed to produce the end items in such time period (weeks / months) mentioned in the schedule. The gross requirement of these materials is reduced to net requirements by taking into account those materials that are in inventory or on order. Henceforth, a schedule of orders is developed for purchased materials based on the knowledge of the lead times for procurement of those materials.

Objectives of MRP I 1. To improve customer service by meeting delivery schedules promised and shortening delivery lead times. 2. To reduce inventory costs by reducing inventory levels. 3. To improve plant operating efficiency by better use of productive resources. 4. To act as a planning as well as a controlling system over the production operations and procurement of materials.

Since MRP is a computer based system, it was possible to expand the system into a manufacturing planning and control system, by providing information for planning and controlling both the material and capacity required to manufacture the products. Hence, MRP serves as a key component in an information system for planning and controlling production operations and procurement of materials. MRP I, when extended to include feedback from and control of vendor orders and production operations, it is called Closed-loop MRP which helps managers achieve effective manufacturing control. MRP Inputs 1)Master Production Schedule :-One of three primary inputs in MRP; states which end items are to be produced, when these are needed, and in what quantities.It is a Timephased plan specifying timing and quantity of production for each end item.

2) Bill-of-Materials :- One of the three primary inputs of MRP; a listing of all of the raw materials, parts, subassemblies, and assemblies needed to produce one unit of a product. 3) Inventory Records It is one of the three primary inputs in MRP.It Includes :information on the status of each item by time period Gross requirements Scheduled receipts Amount on hand Lead times Lot sizes MRP Processing Gross requirements Schedule receipts Projected on hand Net requirements Planned-order receipts Planned-order releases MRP Outputs Planned orders - schedule indicating the amount and timing of future orders. Order releases - Authorization for the execution of planned orders. Changes - revisions of due dates or order quantities, or cancellations of orders. Benefits of MRP Low levels of in-process inventories Ability to track material requirements Ability to evaluate capacity requirements Means of allocating production time Requirements of MRP Computer and necessary software Accurate and up-to-date Master schedules Bills of materials Inventory records Integrity of data

MRP II
In the early 1980s MRP was expanded into a much broader approach. This new approach, manufacturing resource planning (MRP II), was an effort to expand the scope of production resource planning and to involve other functional areas of the firm in the planning process, most notably marketing and finance, but also engineering, personnel, and purchasing. Incorporation of other functional areas allows all areas of the firm to focus on a common set of goals. It also provides a means for generating a variety of reports to help managers in varying functions monitor the process and make necessary adjustments as the work progresses.

The MRP II system can simulate a certain decision's impact throughout the organization, and predict its results in terms of customer orders, due dates, or other "what if" outcomes. Being able to answer these "what if" questions provides a firmer grasp of available options and their potential consequences. The MRP II system can use the bill of resources to project shortages at specific times, giving departments advance notice of required remedial action: for example, of the need to hire or train labour. MRP II can also project needs for support resources; for example, design engineering support if a customer order entails prior design work. This additional resource is added to the bill of resources. Given still more reference data, MRP II can keep track of tool wear and recommend when to replace or reshape tooling. It can also keep track of machine loads and project machine capacity shortages, which may signal a need for more machines or a subcontractor.

ERP Definition
Definition :- ERP is a process of managing all resources and their use in the entire enterprise in a coordinated manner ERP is a set of integrated business applications, or modules which carry out common business functions such as general ledger, accounting, or order management What is ERP? Enterprise Resource Planning Support business through optimizing, maintaining, and tracking business functions It is broken down into business processes HRM Distribution Financials Manufacturing What makes ERP different 1. Integrated modules 2. Common definitions 3. Common database 4. Update one module, automatically updates others 5. ERP systems reflect a specific way of doing business 6. Must look at your value chains, rather than functions Benefits of ERP 1. Common set of data 2. Help in integrating applications for decision making and planning 3. Allow departments to talk to each other 4. Easy to integrate by using processed built into ERP software

5. A way to force BPR (reengineering) 6. Easy way to solve Y2K problem Disadvantages of ERP 1. Very difficult 2. Extremely costly and time intensive 3. Typical: over $10,000,000 and over a year to implement 4. Company may implement only certain modules of entire ERP system 5. You will need an outside consultant Common Pitfalls Do not adequately benchmark current state Did not plan for major transformation Did not have executive sponsorship Did not adequately map out goals and objectives Highly customized systems to look like old MRP systems

Distribution Requirement Planning

Systematic process for determining which goods, in what quantity, at which location, and when are required in meeting anticipated demand. This inventory related information is then entered into a manufacturing requirements planning (MRP-I) system as gross requirements for estimating input flows and production schedules. extends the logic of MRP into the physical distribution system. is a mechanism for integrating the physical distribution system with the production planning and scheduling system. assists in maintaining distribution inventories in field warehouses, distribution centers, etc., by improving the linkages between marketplace requirements and manufacturing activities. helps managers anticipate future requirements and closely match the supply of products to demand, and adjust to changes in the marketplace. can yield significant logistics savings through improved planning of transportation, dispatching, etc. Distribution Requirements Planning It plays a central role in coordination for entire organization. Detailed local information Critical link between marketplace, demand forecasting, and master production scheduling Generates valuable information for the master scheduling process Distribution Resources Planning DRP II It is an extension of DRP 1.It applies the time phased logic of DRP 1 to replenish inventories in multi echelon warehousing systems.It extends DRP 1 to include the

planning of Key resources in a distribution system.ie warehouse space,manpower levels,transport capacity.and financial flows. It uses the needs of distribution to drive the master schedule,controlling the bill of materials and ultimatel MRP 1. Comparison of MRP & DRP SCOPE Dependence for planning Inputs Coordination responsibility Nature of plan Demand Planning Tool Type of inventory Inventory planning DRP Outbound Logistics Market Requirement Once the Finished Goods are produced Short term and accurate Independent Delivery schedules Store keeping units For marketing channel and warehouses MRP Inbound Logistics Forecast based on past data From Raw materials to production of finished goods. Long term Dependent Production schedules Raw materials,Components For Raw material stores and production processes