Operations management

Unit 4 –
Materials management
Material management
 stores management
Maintenance management
 mrp i & ii
Inventory management
Inventory records
Vendor selection and rating
 MATERIAL REQUIREMENTS PLANNING (MRP)

A computer - based information system that translates master

schedule requirements for end items into time-phased
requirements for subassemblies, components, and raw materials.
 It does so by working backward from the due date using lead
times and other information to determine when and how much
to order.
 MRP is designed to answer three questions:
1) What materials are needed to manufacture a product?
2) How much of those materials are needed? and
3) When is it needed?
Over View of MRP
 MATERIAL REQUIREMENTS PLANNING (MRP)

A) MRP Inputs:
An MRP system has three major inputs:
1) a master schedule,
2) a bill-of-materials file, and
3) inventory records.
 MATERIAL REQUIREMENTS PLANNING (MRP)

2) Bill-of-materials
(Definition already covered in Unit 3)
 The listing in the bill of materials is hierarchical; it shows
the quantity of each item needed to complete one unit of
its parent item.
 It is usually considered as a product structure tree which
is a visual depiction of the requirements in a bill of
materials, where all components are listed by levels.
Assembly diagram and product structure tree for chair assembly
MATERIAL REQUIREMENTS PLANNING (MRP)

 Development of a material requirements plan is based on

the product structure tree diagram.
 Requirements are determined level by level, beginning with
the end item (the top of the tree) and working down the
tree, because the timing and quantity of each “parent” item
become the basis for determining the timing and quantities
of the “children” items directly below it.
 The children items then become the parent items for the
next level, and so on.
MATERIAL REQUIREMENTS PLANNING (MRP)

3) The Inventory Records

 Refer to stored information on the status of each item by
time period, called time buckets.
 This includes gross requirements, scheduled receipts, and
expected amount on hand.
 It also includes other details for each item, such as supplier,
lead time, and lot size policy.
 Changes due to stock receipts and withdrawals, canceled
orders, and similar events also are recorded in this file.
 MATERIAL REQUIREMENTS PLANNING (MRP)

B) MRP Processing:
MRP processing takes the end item requirements specified by
the master schedule and “explodes” them into time-phased
requirements for assemblies, parts, and raw materials using
the bill of materials offset by lead times.
Assembly time chart showing material order points needed to
meet scheduled availability of the end item
MRP processing combines the time phasing & “explosion” into a
sequence of spreadsheet sections, where each section has the
following format:
 MATERIAL REQUIREMENTS PLANNING (MRP)

Gross requirements:
 The total expected demand for an item or raw material during
each time period without regard to the amount on hand.
 For end items, these quantities are shown in the master
schedule; For components, these quantities are derived from
the planned-order releases of their immediate “parents.”
Scheduled receipts:
Are Open orders (orders that have been placed and are
scheduled to arrive from vendors or elsewhere in the pipeline
by the beginning of a period).
 MATERIAL REQUIREMENTS PLANNING (MRP)
Projected on hand:
The expected amount of inventory that will be on hand at the
beginning of each time period: scheduled receipts plus available
inventory from last period.
Net requirements:
The actual amount needed in each time period.
Planned-order receipts:
The quantity expected to be received by the beginning of the
period in which it is shown.
Under lot-for-lot ordering, this quantity will equal net
requirements.
Under lot-size ordering, this quantity may exceed net
requirements.
 MATERIAL REQUIREMENTS PLANNING (MRP)

Planned-order releases:
Indicates a planned amount to order in each time period; equals
planned-order receipts offset by lead time.
This amount generates gross requirements at the next level in the
assembly or production chain.
When an order is executed, it is removed from “planned-order
releases” and entered under “scheduled receipts.”
 MATERIAL REQUIREMENTS PLANNING (MRP)

The determination of the net requirements ( netting ) is the core

of MRP processing.
One accomplishes it by subtracting from gross requirements the
sum of inventory on hand and any scheduled receipts, and then
adding in safety stock requirements, if applicable:
 MATERIAL REQUIREMENTS PLANNING (MRP)

C) MRP Outputs:
 MRP systems have the ability to provide management with a fairly
broad range of outputs.
 These are often classified as primary reports, which are the main
reports, and secondary reports, which are optional outputs.
I. Primary Reports: Production and inventory planning and control
are part of primary reports. These reports normally include :
a) Planned orders : a schedule indicating the amount and timing
of future orders.
b) Order releases : authorizing the execution of planned orders.
c) Changes to planned orders: including revisions of due dates
or order quantities and cancellations of orders.
 MATERIAL REQUIREMENTS PLANNING (MRP)

II. Secondary Reports.

a) Performance-control reports evaluate system operation.
They aid managers by measuring deviations from plans,
including missed deliveries and stock outs, and by providing
information that can be used to assess cost performance.
b) Planning reports are useful in forecasting future inventory
requirements. They include purchase commitments and other
data that can be used to assess future material requirements.
c) Exception reports call attention to major discrepancies
such as late and overdue orders, excessive scrap rates,
reporting errors, and requirements for nonexistent parts.
 Benefits of MRP
1) To easily determine the quantities of every component for a
given order size.
2) To know when to release orders for each component.
3) Low levels of in-process inventories, due to an exact matching
of supply to demand.
4) The ability to keep track of material requirements.
5) The ability to evaluate capacity requirements generated by a
given master schedule.
6) A means of allocating production time.
7) The ability to easily determine inventory usage by back-flushing.
(Back-flushing is a procedure in which an end item’s bill of materials
(BOM) is periodically exploded to determine the quantities of the
various components that were used to make the item.)
MANUFACTURING RESOURCE PLANNING - MRPII

History
 Prior to MRP, and before computers dominated
industry, reorder point (ROP)/reorder-quantity (ROQ) type
methods like EOQ (economic order quantity) had been used in
manufacturing and inventory management.
 EOQ model was developed by Ford W. Harris in 1913.
(an American production engineer)
 In 1964, as a response to the Toyota Manufacturing
Program, Joseph Orlicky developed material requirements
planning (MRP). (Orlicky's 1975 book Material Requirements
Planning has the subtitle The New Way of Life in Production and
Inventory Management.)
MANUFACTURING RESOURCE PLANNING - MRPII

 The first company to use MRP was Black & Decker in 1964,
with Dick Alban as project leader.
 By 1975, MRP was implemented in 700 companies. This number
had grown to about 8,000 by 1981.
 In 1983, Oliver Wight developed MRP into manufacturing
resource planning (MRP II).
 In the 1983, Joe Orlicky's MRP evolved into Oliver Wight's
manufacturing resource planning (MRP II) which brings master
scheduling, rough-cut capacity planning, capacity requirements
planning and other concepts to classical MRP.
 By 1989, about one third of the software industry was MRP II
software in America ($1.2 billion worth of software)
MANUFACTURING RESOURCE PLANNING - MRPII

 MRP II is an expanded approach to materials planning to

include capacity requirements planning and to involve other
functional areas of the organization such as marketing and
finance in the planning process.
 MRP II did not replace or improve MRP I; rather, it expanded
the scope of MRP I.
 MRP II systems have the capability of performing simulation,
enabling managers to answer a variety of what-if questions so
they can gain a better appreciation of available options and
their consequences.
An Overview of MRPII
 CLOSED LOOP MRP

 When MRP was introduced, it did not have the capability to

assess the feasibility of a proposed plan (i.e., if sufficient capacity
existed at every level to achieve the plan).
 Thus, there was no way of knowing before executing a
proposed plan if it could be achieved.
 Consequently, a new plan had to be developed each week.
 When MRP II systems began to include feedback loops, they
were referred to as closed-loop MRP.
 Closed-loop MRP systems evaluate a proposed material plan
relative to available capacity. If a proposed plan is not feasible, it
must be revised. The evaluation is referred to as capacity
requirements planning.
 CAPACITY REQUIREMENTS PLANNING

 Capacity requirements planning is the process of determining

short-range capacity requirements.
 The necessary inputs include planned-order releases for MRP,
the current shop load, routing information and job times.
 Key outputs include load reports for each work centre.
 When variances (under loads or overloads) are projected,
managers might consider remedies such as alternative routings,
changing or eliminating of lot sizing or safety stock
requirements and lot splitting.
 CAPACITY REQUIREMENTS PLANNING

 A firm usually generates a master schedule initially in terms of

what is needed but not what is possible.
 It is often necessary to run a proposed master schedule through
MRP processing in order to obtain a clearer picture of actual
requirements, which can then be compared to available capacity
and materials.
 If it turns out that the current master schedule is not feasible,
decision may be taken to increase capacity (e.g., through
overtime or subcontracting) or to revise the master schedule.
 In the latter case, this may entail several revisions, each of which
is run through the system until a feasible plan is obtained.
 At that point, the master schedule is frozen, at least for the near
term, thus establishing a firm schedule from which to plan
requirements.
Using MRP to assist CRP
 ENTERPRISE RESOURCE PLANNING (ERP)

 Integration of all business functions including manufacturing on a

single computer system that will permit information sharing
among different areas of an organization in order to manage the
system more effectively.
 Business organizations are complex systems in which various
functions such as purchasing, production, distribution, sales,
human resources, finance, accounting etc must work together to
achieve the goals of the organization.
 However, in the functional structure used by many business
organizations, information flows freely within each function, but
not so between functions.
 ENTERPRISE RESOURCE PLANNING (ERP)

 ERP software provides a system to capture and make data

available in real time to decision makers and other users
throughout an organization.
 ERP systems are composed of a collection of integrated
modules that relate to the functional areas of business
organizations such as accounting and finance, HR, product
planning, purchasing, inventory management, distribution, order
tracking, finance, accounting, marketing, sales & distribution etc.
 An important feature of the modules is that data entered in one
module is automatically routed to other modules, so all data is
immediately updated and available to all functional areas.
 It should be noted that implementations are costly and time
consuming, often lasting many years, and require extensive
employee training throughout the organization.
 INVENTORY
 An inventory is a stock or store of goods
 Inventory can be broadly classified into:
1) Raw materials & Purchased parts - materials and components
scheduled for use in making a product.
2) Work in process (WIP) – Partially completed goods; materials
and components that have begun their transformation to
finished goods.
3) Finished goods - goods ready for sale to customers.
4) Goods for resale - returned goods that are saleable.
5) Stocks in transitto warehouses, distributors, or
customers (pipeline inventory).
6) Consignment stocks - is an arrangement when a company has
its goods at third-party locations with ownership interest
retained until goods are sold.
7) MRO Supplies – Maintenance, Repaid and Operations
 INVENTORY

There are five basic reasons for keeping an inventory

1) Time - The time lags and 'variations in lead time'. present in
the supply chain, from supplier to user at every stage, requires
that you maintain certain amounts of inventory to use in
this lead time.
2) Seasonal Demand: demands varies periodically, but
producer’s capacity is fixed. This can lead to stock
accumulation.
3) Uncertainty - Inventories are maintained as buffers to meet
uncertainties in demand, supply and movements of goods.
 INVENTORY
4) Economies of scale - Ideal condition of "one unit at a time
at a place where a user needs it, when he needs it" principle
tends to incur lots of costs in terms of logistics. So bulk
buying, movement and storing brings in economies of scale,
thus inventory.
5) Appreciation in Value - In some situations, some stock gains
the required value when it is kept for some time to allow it
reach the desired standard for consumption, or for
production.
For example; beer in the brewing industry
 INVENTORY

Reasons not to keep high inventory levels:

 Obsolescence:
due to progress of technology, the bought inventory for future
use may become obsolete.
 Capital Investment
 Space Usage
 Complicated Inventory Control Systems:
higher number of inventory items complicates the control and
monitoring items.
 INVENTORY MANAGEMENT

 Inventory management is primarily about specifying the size

and placement of stocked goods.
 Inventory management is required at different locations within
a facility or within multiple locations of a supply network to
protect the regular and planned course of production against
the random disturbance of running out of materials or goods.

 The scope of inventory management also concerns the fine

lines between replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting,
physical inventory, available physical space for inventory, quality
management, replenishment, returns and defective goods and
demand forecasting and also by replenishment.
 INVENTORY MANAGEMENT

 Inventory management is the overseeing and controlling of

the ordering, storage and use of components that a company
will use in the production of the items it will sell and of
finished products for sale.
 It costs money to store, track and insure inventory.
Inventories that are mismanaged can create significant financial
problems for a business.
 Inventory management has two main concerns.
 One is the level of customer service, ie; to have the right
goods, in sufficient quantities, in the right place, at the right
time.
 The other is the costs of ordering and carrying inventories.
 INVENTORY TURNOVER

 A widely used measure to judge the effectiveness of

inventory management
 It is the ratio of annual cost of goods sold to average
inventory investment.
 The turnover ratio indicates how many times a year the
inventory is sold. Generally, the higher the ratio, the better,
because that implies more efficient use of inventories.
 The higher the profit margins, the lower the acceptable
number of inventory turns, and vice versa.
 Also, a product that takes a long time to manufacture, or a
long time to sell, will have a low turnover rate.
 REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT

1) A system to keep track of the inventory on hand and 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.
 INVENTORY RECORDS

 An inventory record contains information about the type and

amount of stock an entity possesses.
 This includes inventory on hand, inventory that is on order
and inventory that is on hold for work-in-progress.
 It is also known as a stock record.
 A typical inventory record is maintained as manual or as a
computer file.
 Its complexity depends upon the size of the company, the
variety of products processed, and the volume of production.
 Many inventory accounts will have a description of each piece;
information about its location, quantity and identification
number.
 INVENTORY RECORDS
Inventory Records is useful:
 As it contains data about all items in stock.
 As it helps to give a company an idea as to when to re-order.
 In tracking the regular flow of materials.
 to determine what percentage of stock is in use at any given
time and whether there is too much idle inventory.
 As it make it easier to determine how much stock to keep on
hand and thus reduce the cost of maintaining excess inventory.
 By providing information on daily finances to preparing yearly
taxes.
 By understanding where each piece is held, it helps to improve
the efficiency of operations by rearranging and maintaining
stock in the location that is most beneficial for production.
 Computerised Inventory Management

 Integration of sub-functions involved in the management of

inventory into a single cohesive system.
 A computerized inventory system allows a business to catalog
their inventory electronically, instead of keeping a cumbersome
paper inventory system. This would be especially handy for a
business that has multiple warehouses of inventory.
 It is software installed on the computer systems that enables a
firm to keep a check on the inventory levels by performing the
automatic counting of inventories, recording withdrawals and
revising the stock balance.
 Computerised Inventory Management

 Computerized inventory control system integrates its

inventory control system with the other systems such as
accounting and sales, that helps in better control of inventory
levels.
 In practice, when the inventory level reaches to its minimum
point, the system automatically generates a purchase order,
which is sent to the supplier electronically. Also, the other
copy of the PO is sent to the accounting department.
 Once the material is received from the supplier, an inventory
gets updated on the system and at the same time, the
notification is sent to the accounting department, which is
used against the supplier’s Invoice and the PO copy.
 Computerised Inventory Management

 Computerized Inventory Management systems thus helps

organizations to manage their inventories electronically
without wasting much time on the manual tracking system.
 Also, all the documents, such as purchase order, Invoice,
account statement gets automatically generated with a use of
computerized inventory control system.
Computerised Inventory Management System
Computerised Inventory Management System
 Inventory Management Software

 is a computer-based system for tracking inventory levels,

orders, sales and deliveries.
 It can also be used in the manufacturing industry to create
a work order, bill of materials and other production-related
documents.
 Companies use inventory management software to avoid
product overstock and outages.
 It is a tool for organizing inventory data that before was
generally stored in hard-copy form or in spreadsheets.
 Inventory Management Software

Inventory management software is used for a variety of purposes,

including:
 Maintaining a balance between too much and too little
inventory.
 Tracking inventory as it is transported between locations.
 Receiving items into a warehouse or other location.
 Picking, packing and shipping items from a warehouse.
 Keeping track of product sales and inventory levels.
 Cutting down on product obsolescence and spoilage.
 Avoiding missing out on sales due to out-of-stock situations.
A Few Inventory Management Softwares

HandiFox
Revel iPad POS
by TecomGroup
by Revel Systems

TapHunter
InventoryTrack
by TapHunter
by Jolly Technologies

Solid Commerce
Windward System Five by Solid Commerce
by Windward Software

CashFootprint Point-of-Sale Stock&Buy

by LotHill Solutions by Stock&Buy
 MATERIALS MANAGEMENT

defined as that function of business that is responsible for the

coordination of planning, sourcing, purchasing, receiving,
moving, storing, controlling of materials and scrap disposal;
in an optimum manner and at a minimum cost.
The fundamental objectives of the Materials Management function
(often called the famous 5 Rs of Materials Management) are -
Acquisition of Materials and Services :
1) of the right quality
2) in the right quantity
3) at the right time
4) from the right source
5) at the right price.
 INTEGRATED MATERIALS MANAGEMENT
Integration of all functions of materials management for better
close coordination and better operations in minimum cost; is
referred to as Integrated Materials Management.
Functions of Materials Management are :
1) Planning, (MRP)
2) Sourcing, (Vendor Rating & Evaluation)
3) Purchasing,
4) Receiving & Inspection,
5) Moving, (Material Handling & Transportation)
6) Storing,
7) Controlling Of Materials; and
8) Scrap Disposal
 INTEGRATED MATERIALS MANAGEMENT

Components of Integrated Materials Management

 Materials Planning
 Inventory Control
 Purchase Management
 Stores Management
The various tasks under each components are :
A) Materials Planning
 Estimating the individual components of parts
 Preparing the materials budget
 Forecasting the levels of inventories
 Scheduling the orders
 Monitoring the performance in relation to production & sales
 INTEGRATED MATERIALS MANAGEMENT

B) Inventory Control
 ABC Analysis
 Fixing EOQ
 Lead Time Analysis
 Setting Safety Stock and Reorder Level.
C) Purchase Management
 Evaluating and rating supplies
 Selection of supplies
 Finalisation of terms of purchase
 Placement of purchase orders
 Follow up
 Approval of payments to suppliers
 INTEGRATED MATERIALS MANAGEMENT

D) Stores Management
 Physical control of materials
 Preservation of stores
 Minimization of obsolescence & damage through handling
 Disposal and efficient handling
 Maintenance of stores records
 Proper location and stocking of materials
 Reconciling the materials with book figures.
 INVENTORY DECISIONS

Two Main inventory decisions taken are:

 When to replenish the inventory of that item.
 How much of an item to order when the inventory of that
item is to be replenished.
 ECONOMIC ORDER QUANTITY
Economic Order Quantity
 is the order quantity that minimizes the total holding
costs (carrying cost) and ordering cost.

Assumptions of Economic Order Quantity

1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the year so that the
demand rate is reasonably constant.
4. Lead time is known and constant.
5. Each order is received in a single delivery.
6. There are no quantity discounts.
Carrying costs are linearly Ordering costs are inversely and
related to order size. nonlinearly related to order size..

The total-cost curve is U-shaped.

 ECONOMIC ORDER QUANTITY

A) Annual carrying cost:

is computed by multiplying the average amount of inventory on
hand by the cost to carry one unit for one year.(even though any
given unit would not necessarily be held for a year. )
The average inventory is simply half of the order quantity:
The amount on hand decreases steadily from Q units to 0, for an
average of (Q+0)/2, or Q /2.

Where;
Q - Order quantity in units
H - Holding (carrying) cost per unit per year
 ECONOMIC ORDER QUANTITY

B) The number of orders per year =

Where
D - Demand, usually in units per year
Q - Order quantity in units

C) Annual ordering cost =

(the number of orders per year * ordering cost per order.)
Where
S - Ordering cost per order

D) The total annual cost (TC) = =

(Note that D and H must be in the same units, e.g., months, years.)
 ECONOMIC ORDER QUANTITY

E) Economic Order Quantity,

F) The length of an order cycle (ie; the time between orders) is :

 Sample EOQ Problem

A local distributor for a national tire company expects to sell

approximately 9,600 steel-belted radial tires of a certain size and
tread design next year. Annual carrying cost is $16 per tire and
ordering cost is $75. The distributor operates 288 days a year.

a) What is the EOQ?

b) How many times per year does the store reorder?
c) What is the length of an order cycle?
d) What is the total annual cost if the EOQ quantity is ordered?
Sample EOQ Problem
 ECONOMIC ORDER QUANTITY

 Carrying cost is sometimes stated as a percentage of the price

of an item rather than as an amount per unit.
 In such cases, we need to convert the percentage to amount
per unit.

Piddling Manufacturing assembles security monitors. It purchases

3,600 black-and-white cathode ray tubes a year at $65 each.
Ordering costs are $31, and annual carrying costs are 20 percent
of the purchase price.
Compute the optimal quantity and the total annual cost of
ordering and carrying the inventory.
ECONOMIC ORDER QUANTITY
 ECONOMIC ORDER QUANTITY

The total cost curve is relatively flat near the EOQ

 REORDER POINT ORDERING

 EOQ models answer the question of how much to order, but

not the question of when to order.
 The latter is determined b Re-Order Point (ROP) in terms of a
quantity:
 Its the point at which an item is ordered when its quantity on
hand drops to a predetermined amount.
 That amount generally includes expected demand during lead
time and perhaps an extra cushion of stock, which serves to
reduce the probability of experiencing a stock-out during lead
time.
 In order to know when the reorder point has been reached,
perpetual and continuous inventory monitoring is required.
 REORDER POINT ORDERING
There are four determinants of the reorder point quantity:
1) The rate of demand (usually based on a forecast).
2) The lead time.
3) The extent of demand and/or lead time variability.
4) The degree of stock-out risk acceptable to management.
If demand & lead time are both constant; ROP is:
 REORDER POINT ORDERING

Tingly takes Two-a-Day vitamins, which are delivered to his home

by a routeman seven days after an order is called in. At what point
should Tingly reorder?

Thus, Tingly should reorder when 14 vitamin tablets are left, which
is equal to a seven-day supply of two vitamins a day.
 REORDER POINT ORDERING

 When variability is present in demand or lead time, it creates

the possibility that actual demand will exceed expected
demand.
 Consequently, it becomes necessary to carry additional
inventory, called safety stock, to reduce the risk of running out
of inventory (a stockout) during lead time.
 Safety Stock is the stock that is held in excess of expected
demand due to variable demand and/or lead time.
 The reorder point then increases by the amount of the safety
stock:
 REORDER POINT ORDERING
 Because it costs money to hold safety stock, a manager must
carefully weigh the cost of carrying safety stock against the
reduction in stock-out risk it provides.
 The customer service level increases as the risk of stock-out
decreases.
 Order cycle service level is defined as the probability that
demand will not exceed supply during lead time (i.e., that the
amount of stock on hand will be sufficient to meet demand).
Hence, a service level of 95 percent implies a probability of 95
percent that demand will not exceed supply during lead time.

i.e;
 REORDER POINT ORDERING

(i) Maximum Level of Stock =

(Reorder Level + Reorder Quantity) – (Minimum rate of
consumption x Minimum reorder period)
Maximum Level may be alternatively fixed as Safety Stock +
Reorder Quantity or EOQ.
(ii) Minimum level of stock =
Reorder level – (Average rate of consumption x Average reorder
period)
(iii) Average Stock level =
Minimum Stock Level + ½ of Reorder Quantity
 REORDER POINT ORDERING

If the minimum stock level and average stock level of raw

material A are 4,000 and 9000 units respectively, find out its
reorder quantity.
Solution:
Average stock level = Minimum stock level + ½ of Reorder
Quantity
9000 = 4000 + ½ of Reorder Quantity
½ of Reorder Quantity = 9000 – 4000 = 5000
Reorder Quantity = 10,000 units
Problem (Max-Min Level; ROL)
Solution –A: (Max-Min Level; ROL)
Solution –B: (Max-Min Level; ROL)
 CLASSIFICATION OF INENTORY
 An important aspect of inventory management is that items held
in inventory are not of equal importance in terms of dollars
invested, profit potential, sales or usage volume, or stock - out
penalties.
 Instead, a more reasonable approach would be to allocate
control efforts according to the relative importance of various
items in inventory.
 Main classifications are :
 A-B-C Analysis
 XYZ Analysis
 VED Analysis
 FSN Analysis
 SDE Analysis; etc
 A-B-C- Analysis

 ABC Analysis is a technique which is used to classify inventory

based on its demand, usually annual dollar value (i.e., dollar value
per unit multiplied by annual usage rate), and then allocates
control efforts accordingly.
Typically, three classes of items are used:
 A(very important), B(moderately important)& C (least important)
 Generally; A items account for about 10 to 20 percent of the
number of items in inventory but about 60 to 70 percent of the
annual dollar value.
 At the other end of the scale, C items might account for about 50
to 60 percent of the number of items but only about 10 to 15
percent of the dollar value of an inventory.
 A-B-C-Analysis

 Mostly, “A” items with small number of items will account for a
large share of the cost associated with an inventory, and these
items should receive a relatively greater share of control
efforts.
 The C items should receive only loose control (two-bin
system, bulk orders), and
 the B items should have controls that lie between the two
extremes.
 A-B-C-Analysis
To solve an A-B-C problem, follow these steps:
1) For each item, multiply annual volume by unit price to get the
annual dollar value.
2) Arrange annual dollar values in descending order.
3) The few (10 to 15 percent) with the highest annual dollar value
are A items. The most (about 50 percent) with the lowest
annual dollar value are C items. Those in between(about 35
percent) are B items.
A-B-C-Analysis
A-B-C-Analysis
 XYZ Analysis

 Is aimed to evaluate the fluctuations in demand or

consumption of the items in inventory.
 For each item, coefficient of variation is computed and then
they are classified coefficient of variation as per the ratio of
20% : 30% : 50% for X,Y,Z items respectively.
 VED Analysis

 Refers to Vital, Essential and Desirable classifications.

 ABC Analysis stands for the market values ,whereas the VED
analysis stands for their “Nuisance values”.
 Nuisance value is the cost associated with materials due to
their absence or shortage.
 If the materials are not available, the whole production system
needs to be stopped leading to high cost due to loss of
production.
 The investment in such materials can be small, but its absence
will lead to heavy loss.
 Classification of inventory based on the nuisance value is called
VED analysis.
 FSN Analysis

 Is based on the frequency of use of the items in inventory.

 F stands for “Fast Moving Items”, S stands for “Slow Moving
Items”, and N stands for “Non Moving Item”.
 Generally, frequency of F items will be more than one in a
month; S will be less than one in a month; and N will be zero
during 2 year period.
 SDE Analysis

 SDE analysis is done based on the lead time required to

procure the items.
 S means “ Scarce Commodity”, D – “Difficult to Procure” and
E – “Easily Available”.
 Generally S items are those which have more than 6 months
lead time. Imported items are also grouped as S.
 D items have a lead time of more than 2 weeks but less than 6
months.
 E items have a lead time of less than 2 weeks.
 SPARE PARTS MANAGEMENT
 Spare parts Management plays an important role in achieving
the desired plant availability at an optimum cost by reducing
the downtime of machinery and plants.
 In many industries the non-availability of spare parts, as and
when required for repairs; contributes a major role in the
total down time.
 The cost of spare parts also forms a major chunk of the total
maintenance cost in the industry.
 The objective of spare parts management is to ensure
the availability of spares for maintenance and repairs of
the plant and machinery as and when required at an
optimum cost.
 SPARE PARTS MANAGEMENT
 The unique problems faced by the organisation in
controlling/managing the spare parts are as follows:
 Firstly, there is an element of uncertainty as to when a part is
required and also the quantity of its requirement.
 This is due to the fact that the failure of a component,
either due to wearing out or due to other reasons, can not
be predicted accurately.
 Secondly, spare parts are not that easily available in the market
as they are not fast moving items.
 The original equipment manufacturer has to supply the
spares in most of the cases.
 SPARE PARTS MANAGEMENT
 New models are introduced to incorporate the design
improvements and old models are phased out. Hence the
spares for old models are not readily available. Particularly,
this is more so in case of imported equipment.
 Thirdly, the number and variety of spare parts are too
large making the close control more and more tedious.
 Fourthly, there is a tendency from the stage of purchase
of the equipment to the stage of the use of the spare
parts, to requisition spare parts more number than that
are actually required and accumulation of spares takes
place.
 SPARE PARTS MANAGEMENT

 Finally, the rate of consumption of spare parts for some

are very high and for some are very low.