Material Productivity

By T. A. Khan

January 2008
 RM Productivity

Output (value or unit or value added)

Raw materials productivity =
Value of Raw material used

How to Increase?
Efforts to reduce the cost of input materials.
 Material productivity
 Reduce scrap or waste so that a higher
percentage of the raw materials is utilised.
 Use of non corrosive materials or coatings to
increase product life. (e.g. Bridges, highways
& tools etc.)
 Reduce inventories to get higher returns per
unit of inventory item.
 Cost of Input Materials
 Reduce the actual quantity of materials used
per unit of the finished product.
 Improve product design.
 Improve manufacturing processes to:
 Enhance product quality
 Reduce material waste.

 Improve Supplier’s processes

 Reduce inventory costs.
 What is Inventory?
Stock of materials
Stored capacity
Examples
 The Functions of Inventory
 To provide a stock of goods that will
provide a “selection” for customers
 To take advantage of quantity discounts
 To hedge against inflation and upward price
changes.
 Protect against shortages
 WIP decouples production stages
 The Functions of Inventory
 Independence of operations
 Decouple production & distribution
 permits constant production quantities
 Variation in demand
 Flexibility in scheduling
 Supply (lead-time) variability
 Economic purchase order size
 Disadvantages of Inventory
 Higher costs
 Item cost (cost of the item)
 Ordering (or setup) cost
 cost of forms, clerk’s wages, EDI system
 Holding (or carrying) cost
 Building lease, insurance, money tied up
 Difficult to control
 Hides production problems
 Types of Inventory

 Raw material
 Work-in-progress
 Maintenance/repair/operating supply
 Finished goods
 Defectives
 Returns
 Performance and WIP Level
 Less WIP means products go through system faster
 reducing the WIP makes you more sensitive to
problems, helps you find problems faster
 Stream and Rocks analogy:
 Inventory (WIP) is like water in a stream
 It hides the rocks
 Rocks force you to keep a lot of water (WIP) in the stream
Lowering Inventory Reduces
Waste

WIP hides problems

Lowering Inventory Reduces
Waste

WIP hides problems

 Lowering Inventory Reduces
Waste

Reducing WIP makes

problem very visible

STOP
Lowering Inventory Reduces
Waste

Remove problem, run

With less WIP
Lowering Inventory Reduces
Waste

Reduce WIP again to find

new problems
The Material Flow Cycle
 The Material Flow Cycle
Othe r Wai t Mov e Queu Setup Run
In put Tim e Tim e e Tim e Ti me Out pu t
Tim e
Cycle Ti me

1 Run time: Job is at machine and being worked on

2 Setup time: Job is at the work station, and the work
station is being "setup."
3 Queue time: Job is where it should be, but is not being
processed because other work precedes it.
4 Move time: The time a job spends in transit
5 Wait time: When one process is finished, but the job is
waiting to be moved to the next work area.
6 Other: "Just-in-case" inventory.
 Inventory Costs
 Holding costs - associated with holding
or “carrying” inventory over time
 Ordering costs - associated with costs
of placing order and receiving goods
 Setup costs - cost to prepare a machine
or process for manufacturing an order
 Holding (Carrying) Costs
 Obsolescence
 Insurance
 Extra staffing
 Interest
 Pilferage
 Damage
 Warehousing
 Etc.
 Inventory Holding Costs
Category % of Value
Housing (building) cost 6%
Material handling 3%
Labor cost 3%
Opportunity/investment 11%
Pilferage/scrap/obsolescence 3%
Total Holding Cost 26%
 Shrinkage Costs
 How much is stolen?
 2% for discount, dept. stores, hardware, convenience,
sporting goods
 3% for toys & hobbies
 1.5% for all else
 Where does the missing stuff go?
 Employees: 44.5%
 Shoplifters: 32.7%
 Administrative / paperwork error: 17.5%
 Vendor fraud: 5.1%
 ABC Analysis
 Divides on-hand inventory into 3 classes
 A class, B class, C class
 Basis is usually annual $ volume
 $ volume = Annual demand x Unit cost
 Policies based on ABC analysis
 Develop class A suppliers more
 Give tighter physical control of A items
 Forecast A items more carefully
 Classifying Items as ABC
Class % $ Vol % Items
% Annual $ Usage A 80 15
B 15 30
100 C 5 55

80

60

40
A
20
B C
0
0 20 40 60 80 100 120

% of Inventory Items
 Ordering Costs

 Supplies
 Forms
 Order processing
 Clerical support
 Etc.
 Setup Costs

 Clean-up costs
 Re-tooling costs
 Adjustment costs
 Etc
 Inventory Models
 Fixed order-quantity models
 Economic order quantity
 Production order quantity

 Quantity discount

 Probabilistic models
 Fixed order-period models
 EOQ Assumptions
 Known and constant demand
 Known and constant lead time
 Instantaneous receipt of material
 No quantity discounts
 Only order (setup) cost and holding cost
 No stockouts
 Inventory Usage Over Time

Order quantity = Q Usage Rate

(maximum Average
inventory level) Inventory
(Q*/2)
Inventory Level

Minimum
inventory 0
Time
 EOQ Model
How Much to Order?
Annual Cost

urv e
o s t C
lC e
Tota t C urv
Minimum C os
total cost o l d ing
H

Order (Setup) Cost Curve

Optimal Order quantity

Order Quantity (Q*)
 EOQ Model Equations
Optim al O rder Quanti ty 2 ×D ×S
= Q* =
H
Ex pected N um ber of O rde rs = N =
D
Q*
Ex pected T im e Betw een O rder s Wor king D ay s / Year
=T =
N
D D = Dem and per year
d =
Wor king D ay s / Year S = Set up (order) cos t per
order
ROP = d × L H = Hol ding (c arry ing) c ost
d = Demand per day
L = Lead t ime in day s
 Material productivity
Output (value or unit or value added)
Raw materials productivity =
Value of Raw material used

Value of
Perfect Improve Product Design
Requirement

Improve Manufacturing Process

Value of
Value of Raw
waste
Material used. Improve Material Quality

Optimize Inventory carrying Costs

Inventory
Costs
Optimize Inventory Ordering Costs
 ABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000
105 200 600 120,000
019 2,000 55 110,000
144 20,000 4 80,000
207 7,000 10 70,000
Total 1,316,000
 ABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000 71.1 A
105 200 600 120,000 9.1 A
019 2,000 55 110,000 8.4 B
144 20,000 4 80,000 6.1 B
207 7,000 10 70,000 5.3 C
Total 1,316,000 100.0
 Deriving an EOQ
1. Develop an expression for setup or ordering
costs
2. Develop an expression for holding cost
3. Set setup cost equal to holding cost
4. Solve the resulting equation for the best
order quantity
 Why Holding Costs Increase
♦More units must be stored if more are ordered

Purchase Order Purchase Order

Description Qty. Description Qty.
Microwave 1 Microwave 1000

Order quantity Order quantity

Why Order Costs Decrease

1 Order (Postage $ 0.33) 1000 Orders (Postage $330)

Purchase Order PurchaseOrder

Purchase Order
Description PurchaseOrder
Description
Purchase OrderQty.
Qty. Description Qty.
Qty.
Microwave 1000 Description
Microwave Qty. 11
Description
Microwave
Microwave
Microwave 11
Order quantity
 EOQ Model (When To Order)

Inventory Level
Optimal Average
Order Inventory
Quantity (Q*/2)
(Q*)

Reorder
Point (ROP)

Time
Lead Time
The Reorder Point (ROP) Curve

Q*

Slope = units/day = d
Inventory level (units)

ROP
(Units)

Time (days)
Lead time = L
 Sample Problem 1
 Assume you have a product with the following
parameters:
 Annual Demand = 360 units
 Holding cost = $1.00 per unit
 Order cost = $100 per order
 What is the EOQ for this product? Assuming a
300-day work year, how many orders should
be processed per year? What is the expected
time between orders?
 Problem 2 Solution

2* Demand *Order Cost 2*360*100

EOQ    72000  268.33 items
Holding cost 1

Demand 360
N    1.34 orders per year
Q 268

Working days
T  300 /1.34  224 days between orders
Expected number of orders