Om & SCM Mba Aims

Operations Management & Supply Chain
Management (SCM) -- Subject Code: 0406

Operations Management & SCM
Topics to be covered :
1) The Manufacturing Function –What Is manufacturing/production? Operations

Concept of production, production as a conversion process – Objectives of
manufacturing / production function, and Components of production function
– 4 Sessions
2) Manufacturing Systems – Components of the manufacturing system –Input-

Transformation process- Output, Classification of the manufacturing system, Factors
influencing choice of manufacturing system – 4 Sessions
3) Introduction to Materials Management – What is materials management? ,

The supply chain concept- Introduction, Decision phases in supply
chain, processes of a supply chain – 5 Sessions
Topics to be covered :
4) Inventory Fundamentals – Aggregate Inventory management, Item Inventory

management, Inventory and flow of materials, supply-demand patterns, functions of
inventory, Objectives of inventory, Financial statements and inventory, ABC Inventory
control, JIT, Role played by inventories in supply chain. Order Quantities – Economic
Order Quantity (EOQ), Variations of EOQ model, Quantity Discounts, Period Order
Quantity Economic Lot Sizes Vs Practical Constraints – Follow up difficulties, Suppliers
minimum order quantity requirements, lead time, Government regulations, packing
restrictions, Seasonal availability, shelf life, space constraint, how practical order
quantities are arrived at. Know your lead time – meaning Importance elements, its
major parts, control and estimation –6 Sessions
5) Computerization of materials management – Introduction, benefits of computer

system, steps in computerization of database of materials management, Computer
applications in materials management, activities of materials management by
computerization, Management reports on materials, specific inventory reports,
Queries – 4 Sessions
6) Importance of IT in Supply chain, Benefits of IT in supply chain – 3 Sessions

Books Recommended:
1.Manufacturing & Operations management – L C Jhamb
2.Introduction to Materials Management – Tony Arnold, Stephen Chapman
3.Inventory management - L C Jhamb

1) The Manufacturing Function –What Is manufacturing/production? Operations Concept

of production, production as a conversion process – Objectives of manufacturing /
production function, and Components of production function – 4 Sessions
Organization chart of typical manufacturing company
Historical role of Operations Management
The concept of manufacturing & operations is as old as early 19th century. The journey
began in early 1910’s , where principles of scientific management & Industrial psychology
Initiated and concept of EOQ invented. Early 1930’s the focus was shifted to material
inspection, statistical tables and quality control. In late 11950’s and early 1960’s , the
scholars began to work deal specifically with operations management. During this stage
extensive development of operations research tools took place. Scheduling techniques
like CPM ( Critical Path Method ) and PERT ( Program Evaluation & Review Technique )
came in to action. In 1970’s the use of computers was in to industry, concepts like
scheduling , inventory control , forecasting , and MRP were introduced.
The 1980’s saw a revolution in the management philosophies and the technologies
with which the production is carried out. Just-In Time (JIT) and Kanban were the major
breakthrough in the manufacturing philosophy. It was invention of Japanese. Also the
concept of TQC ( Total Quality Control ) came in to picture. This eliminated the causes
of production defects. It was a period of manufacturing strategy paradigm. Synchronous
manufacturing was the highlight of the manufacturing industry.
Historical role of Operations Management
Another major development was the focus on TQM ( Total Quality Management )
took place in late 1980’s and early 1990’s . Quality gurus like W . Edwards. Deming ,
Joseph M Juran , and Philip Crosby put on tremendous contribution to the
world of quality. BNQA ( Baldrige National Quality Award ) was started in 1987 .
The company’s having outstanding quality systems were recognized each year at
the hands of President of America.
Post 1990’s and 2000’s operations management is all about continuous improvements,
Quality certifications, extensive use of Internet, web based world, use of ERP’s ,
techniques like Six Sigma , Poka-Yoke to eliminate defects at the source. SCM has got
Immense importance in OM.
Introduction to Production Management:
Production and operations management concerns itself with the conversion of inputs
into outputs, using physical resources, so as to provide the desired product / service
to the customer , while meeting the other organizational objectives like efficiency ,
effectiveness , and adaptability.
Production is the process by which raw materials and other inputs are converted into
finished goods. Among all the functional areas of management , production is considered
to be crucial in any organization. The other word synonymously used with production is
manufacturing. We can distinguish manufacturing and production as follows.
Manufacturing is refers to the process of producing only tangible goods, where as

production includes creation of both tangible goods as well as intangible services.
Objectives of Production Management:
Right quality , right quantity , right time , and right price are the four basic requirements
of the customers and as such they determine the extend of customer satisfaction. And if
these can be provided at a minimum cost , then the value of goods produced increases.
Thus the objectives of production management are “ to produced goods and services of
the right quality, in the right quantities , according to the time schedule and at a
minimum cost “. Objectives of production management may be stated as under.
• Producing the right kind of goods and services that satisfy customers’ needs
(effectiveness objective ).
• Maximizing output of goods and services with minimum resource inputs
( efficiency objective )
• Ensuring that goods and services produced confirm to pre-set quality specifications
( quality objective )
• Minimizing throughput time – the time that elapses in the conversion process – by
reducing delays, waiting time and idle time ( lead time objective )
• Maximizing utilization of manpower, machines etc. ( capacity utilization objective )
• Minimizing cost of producing goods or rendering a service ( cost objective )
Components of Production function : Production management is essentially
planning , organizing & controlling of production function. Management of
production can be described in terms of 14 components as under …….
A) Planning ( Planning the conversion process & planning the use of conversion
process ) –
1. Product selection and design.
2. Process selection and planning
3. Facility Location
4. Facility layout and materials handling.
5. Capacity planning
6. Forecasting
7. Production Planning
B) Organizing ( Organizing for conversion )
8. Work study and Job design.
C) Controlling ( Controlling the conversion process )
9. Production Control
10. Inventory Control
11. Quality Control
12. Maintenance (PE ) and replacement
13. Cost reduction
14. Cost control
A short description of each component of Production function:
1) Product Selection & Design : The right kind of products and good design of the
products are crucial for the success of an organization. A wrong selection of the
product or poor design of the product can render company’s operations
ineffective and non competitive.
2) Process selection & Planning : Selection of the optimal “ conversion system “ is as

important as choice of products / services and their design. Process selection
decisions includes decisions concerning choice of technology , equipment ,
machines , material handling system , and automation.
3) Facilities ( Plant ) Location : A poor location of the plant can be constant source of
higher cost , difficult marketing & transportation , dissatisfaction among
employees and customers , frequent disturbances in production , sub standard
quality , competitive disadvantages etc.
4) Facilities ( plant ) layout and materials handling : Plant layout is concerned with
relative location of one department with another in order to facilitate material
flow and processing of a product in the most efficient manner through the
shortest possible distance and time.
5) Capacity Planning : Capacity planning concerns determination and acquisition of
productive resources to ensure that their availability matches the demand. Capacity
decisions have a direct influence on performance of the production system in respect
of both resource productivity and customer service.
6) PPC ( Production Planning & Control ): Production planning is the system for
specifying the production procedure to obtain the desired out put in a given time at
optimum cost in conformance with specified std of quality and control is essential to
ensure that manufacturing takes place in the manner stated in the plan.
7) Inventory Control : Inventory control deals with determination of optimal inventory

levels of raw materials , components , parts , tools , finished goods , spares and
supplies to ensure their availability with minimum capital lock-up.
8) Quality Assurance & Control : Quality is an important aspect of production system

and it must ensure that services and products produced by the company conform to
the declared quality standards at the minimum cost. A total quality assurance system
include such aspects like setting std of quality , inspection of Purchased parts, control
of quality during manufacture & inspection of Finished Product.
9. Work Study & Job Design : Work study also called as Time & Motion study , is
concerned with improvement of productivity in the existing jobs and the maximization
of productivity in the design of new jobs. Two principal component of work study are
A) Method study & B) Work Measurement.
A) Method Study : Method study has been defined as the systematic recording and
critical examination of the existing and proposed ways of doing work , as a means of
developing and applying easier and more effective methods and reducing costs.
Method study when applied to production methods yields one or more of the
following benefits …..
• Improved work environment

• Improved facility layout
• Better utilization of facilities
• Greater safety
• Smooth production flow
• Lower WIP
• Lesser materials handling
• Higher earnings for the workmen.
B) Work Measurement : Work measurement is defined as the application of
techniques designed to established the time for a qualified worker to carry out a
specified job under specified condition and at a defined level of performance. Since the
correct standard of performance can be set appropriately only after the work method
has been standardized , method study should precede work measurement. Scientific
work standards can be used in following areas.
• Manpower planning
• Production scheduling
• Cost estimating
• Cost reduction and cost Control
• Financial incentives
• Manufacturing process selection
• Measuring employee progress.
10) Maintenance & Replacement : This involve selection of optimal maintenance

(Preventive & Breakdown ) Policy to ensure higher equipment availability at minimum
maintenance and repair cost.
11) Cost reduction & Cost Control : Effective production management must ensure
minimum cost of production and in this context cost reduction and cost control
acquires significant importance.
2) Manufacturing Systems – Components of the manufacturing system –Input-

Transformation process- Output, Classification of the manufacturing system,
Factors influencing choice of manufacturing system – 4 Sessions
Types of Production System- Continuous ,intermittent, Job lots etc.
There is no best production system for any product. The choice of the system depends
on various circumstances and product under consideration. It must meet two basic
objectives .. namely
• It must be able to meet the specifications of the final product
• It must be cost effective.

Production systems can basically be classified into five groups:
1) Project Production: Where a single assignment of complex nature is undertaken

for completion within the given period and within the estimated expenditure.
2) Jobbing Production: Where one or few units of a product are produced to

customer’s requirement within a given date and within the price fixed prior to the
contract.
3) Batch Production: Where limited quantity of each type of product is authorized for
manufacture at a time.
4) Mass & Flow Production: Where a production run is conducted either on a single
machine or on a number of machines , arranged according to the sequence of
operations and several number of a product are manufactured at a time and
stocked in warehouse awaiting sales.
5) Continuous / Process Production: Where production run is conducted for an

indefinite period.
1) Project Production: Is characterized by complex sets of activities that must be
performed in a particular order within the given period and within the estimated
expenditure. Where output of a project is a product. Operations of such products are
carried out in “ fixed position assembly type of layout”. Examples .. Production of Ships,
locomotive , aircraft , construction of roads , building etc.
Characteristics of project production:
• Definite beginning & definite end

• Non-uniform requirement of resources
• Involvement of different agencies
• “Fixed Position “ Layout
• High Cost
• Personal Problems
• Scheduling & Control – techniques used like .. CPM & PERT
2) Jobbing Production: Is characterized by manufacture of one or few numbers of a
single product designed and manufactured strictly to customer’s specifications, within
a given period and within a price fixed prior to the contract. Some typical examples
of industries engaged in jobbing production are: SPM tool manufacturers, workshops
manufacturing Jigs & Fixtures , building contractors , manufactures of cranes ,
furnaces , pressure vessels etc.
Characteristics of Jobbing Production:
• Small Production runs

• Discontinuous flow of materials
• Disproportionate mfg cycle time
• GP machines & Process layout
• Highly skilled labor
• Highly competent supervision
• Large WIP Inventory
• Limited functions of PP& Control
3) Batch Production: Is characterized by the manufacture of a limited number of a
product ( but many such quantities of different products ) produced at regular intervals
and stocked in warehouses as FG’s, awaiting sales. Typical examples of batch production
are …Process industries such as Pharmaceuticals, Paints , chemicals , engineering industries
engaged in manufacture of electric motors , switch gears, manufacture of readymade
Garments.
Characteristics of Batch Production:
• Short runs
• Skilled labor in specific trades
• Supervisor to have knowledge of the specific process
• Limited span of control
• GPM’s and process type of layout
• Manual materials handling
• Mfg cycle time affected due to queues
• Large WIP
• Flexibility of production schedules
• Need to have production planning & Control
4) Mass & Flow Production: Is characterized by the manufacture of a several number of
a std product produced and stoked in the warehouses as FG’s awaiting sales. The goods
under mass production are manufactured either at a single operation or a series of
operations on one machine. And goods under flow production are manufactured by a
series of operations on different machines , arranged as per sequence of operations.
Typical examples of mass production units are continuous manufacturing industries
such as , Plastic goods , sintered products , hardware etc.
Typical examples of flow production are … manufacture and assembly shop of automobiles ,
refrigerators , TV sets , Radios , domestic appliances etc..
Characteristics of Mass & Flow Production:
• Continuous flow of material

• SPM’s and product type layout
• Mechanized materials handling
• Low skilled labor
• Short Mfg cycle time
• Easy supervision
• Limited WIP
• Lesser flexibility in production schedules
5) Continuous / Process Production: Is characterized by the manufacture of a single
product produced and stocked in the warehouses awaiting sales. The flexibility of such
plants is almost zero as only one type of product can be produced in such plants. Typical
examples of such plants are Sugar, steel , cement , paper, coke , etc.
Characteristics of process production :
• SPM’s with built-in controls

• Highly mechanized materials handling
• Virtually zero manufacturing cycle time.
• Low skilled labor
• Supervisor to be processes specialist
• Negligible WIP
• Limited PP and Control function – A)Materials control function is of crucial importance.
Materials need to be planned well in advance. Scientific inventory control system is a
must for such plants. B) Tools control function is almost absent because of the nature of
the plant. C) PP activity is absolutely not required , since it is the plant which decides the
route. D) Scheduling activity is very simple and is merely restricted to final targets.
Various factors which determines the choice of manufacturing process:
A) Effect of Volume / Variety: One of the major consideration in the process selection is
the volume / variety of the product. High product variety (many products in one or few
numbers ) require highly skilled labor , general purpose machines , detailed and
sophisticated PP & control systems. On the other hand low product variety ( one or few
products produced in large volumes ) enables the use of low skilled labor , highly
automated mass production processes using SPM’s (special purpose machines) and simple
PP & Control systems. These decisions are generally taken during finalizing the corporate
strategy of a firm.
Various factors which determines the choice of manufacturing process:
B) Capacity of the plant: The projected sales volume is a major influencing factor in
deciding whether the firm should go for intermittent or continuous process. Fixed costs are
low for intermittent process and are high for continuous process, where as variable costs
are high for intermittent process and less for that of continuous process. Intermittent
process therefore are cheaper to install and operate at low volumes and continuous
process will be economical to use for high volumes.
C) Flexibility: Flexibility w.r.t. manufacturing is the ability of the company to satisfy varied
customer’s requirements. Flexibility and product variety are inter-linked. Greater verities
demand intermittent manufacturing which is associated with higher inventories , large
manufacturing lead times , and elaborate planning and control.
D) Lead time: Known as delivery lead times , is another major influencing factor in a
competitive market. In general, lower the lead times to make the products available to
customer , better it is for the company.
E) Efficiency: Is effective utilization of machines , manpower and other inputs to produce
the product at minimum manufacturing overhead costs.
F) Environment: Environment brings in new technologies and forces the adoption of new
processes of manufacturing.
Origin of Operations Strategy ….
The word “Strategy” has been derived from Greek word “strategos” means a General.
Meaning of “stratos” is army , and that of “aegin” is to lead. The origin of strategy is the
art of planning and directing large military movements & operations of a campaign or war
Applying above logic to business , strategy is the aspect of both direction ( what to do )
and implementation ( how to do it ) The element of direction concerns with the
approaches the company can take to choose the markets in which to compete , understand
the competitive drivers in the market. While implementation concerns with how company
can match or better meet the competitive drivers , where and how to spend it’s time
and money.
Operations Strategy & Competitiveness
• Efficiency means doing something at the lowest possible cost
• Effectiveness means doing the right things to create the most
value for the Company
• Value is ratio of Quality & Price , V=Q/Price
• Competitiveness is all about ability to increase Quality and reduce
Price while maintaining or improving the profit margins
• This is the way Operations can directly increase customer retention
• Operations management is defined as the design , operation, and improvements
of the systems that create and deliver the firm’s primary products & services.
• Operations management provides a systematic way of looking at organizational
processes.
• Like Finance, Marketing & HR , OM is a functional field of business with clear
line management responsibilities.
• OM is concerned with the management of entire system that produces a good
or delivers a product.
Operations Strategy & Competitiveness
Within the operations function , management decisions can be divided into three
broad areas …..
1) Strategic ( Long-term ) decisions

There are broad level issues and deals with questions like …How we will make
the product , Where do we locate the facility or facilities , How much capacity do
we need, etc. The time frame of strategic decisions is generally very long, several years
Thus decisions made at strategic level become the fixed conditions or constraints under
which the firm must operate in both intermediate & short term stages.
2) Tactical ( Intermediate-term ) decisions

At this level of decision making , tactical planning primarily addresses how to efficiently
schedule the material & labor within the constraints of strategic decisions. The issues
addressed under this stage are ….How many workers do we need , when should we plan
materials receipt, Should we carry finished goods inventory ,
3) Operational Planning & Control ( Short-term ) decisions

The decisions taken by management at operational planning & control level are narrow
and short term as compared to above stages. Here issues involved are like …What
production we plan to make today or this week , Whom do we assign to what task , Which
product should have priority etc.
OS & Competitive dimensions
The growing customer’s expectations is the biggest challenge faced by all manufacturing
and service industries as well. The situation becomes more complicated because different
customers are attracted by different attributes like , Price, Service , Appearance, availability
and many more. To manage these customers expectations is the biggest challenge today
Industry is facing. Following are the major competitive dimensions ….
• Cost : “Make it Cheap “ Within each industry , there are customers who will prefer the
products having low cost. To take care of this group , a firm must be a low cost producer.
Generally these are commodity items. The competition is fierce in this segment.
• Product Quality & reliability : “ Make it Good “ Quality can be divided in to two
categories : Product quality & Process quality. The product quality is driven by the
customer requirements and product itself. Process quality is critical because it relates
directly to the reliability of the product, regardless of customers requirement . The goal
of the process quality is to produce defect free products.
• Delivery Speed : “ Make it Fast “ In some markets, a company’s ability to deliver more
quickly than it’s competitors may be critical.
OS & Competitive dimensions
• Delivery Reliability : “ Deliver It When Promised “ This dimension relates to the
ability of the firm to supply the product or service on or before the promised delivery
due date.
• Coping with changes in demand : “ Change It’s Volume “ In many markets the ability
to respond to the increasing demands in short period of time is an important factor
to compete. At the same time it’s a challenge to manage the reduction in demand.
The ability to effectively deal with dynamic market demand over a period is an essential
element of OS.
• Flexibility & New Product Introduction Speed : “ Change It “ It’s an ability of an

organization to respond to the customers in the shortest lead time to demonstrate
the development of new Products.
• Other criteria : “Support It “ There are many areas apart from described above, where
the customer expects the support from manufacturer like , Spare & service support for
product which is currently not under production. Making product available in colors
of customer choices etc.
Operations Management & Supply Chain Management
(SCM) -- Subject Code: 0406
•Internal Test – Objective type ….
• Producing the right kind of goods and services that satisfy customers’ needs is ----
(effectiveness objective ). And
• Maximizing output of goods and services with minimum resource inputs is ----
( efficiency objective )
• Ensuring that goods and services produced confirm to pre-set quality specifications
( quality objective )
State any FIVE components ( title only ) of the production function ……….
Product Selection & Design, Process selection & Planning , Facilities ( Plant ) Location
Facilities ( plant ) layout and materials handling, Capacity Planning, PPC , Inventory
Control, Quality Assurance & Control , Work Study & Job Design, Method Study.
Operations Management & Supply Chain Management
(SCM) -- Subject Code: 0406
Complete the following statements ……..
• Production is the process by which raw materials and other inputs are converted into
finished goods
• The other word synonymously used with production is

manufacturing.
• Right quality , right quantity , right time , and right price are the four basic
requirements of the customers.
Introduction to Materials Management – What is materials management? The supply

chain concept- Introduction, Decision phases in supply chain, processes of a supply
chain – 5 Sessions
Materials are the key resource in the in an industrial enterprise since no production is
possible without materials. Materials also form the major constituent of the cost of the
product and therefore proper control over their procurement , storage , issue ,
movement and consumption is necessary. Materials management exactly does this.
The integrated approach of materials management is SCM ( Supply Chain Management )
Overview of Supply Chain

A basic purpose of SCM is to control inventory while managing the flow of materials
throughout the SC and satisfying the customers by delivering the product at the right
time and at the right place. Managing the flow of material is common to organizations in
every segment of the economy : manufacturers, wholesalers, retailers, government dept . . .
Typically the manufacturers may spend 60 to 70 % of the total sales revenue on

purchased materials and services. A typical service provider may spend 30 to 40 % of
total revenue on purchased material & services. Now a days , companies are relying more
than ever on suppliers from around the world. Because materials comprise such a large
component of sales revenue , companies can reap large profits with a small percentage
reduction in the cost of materials. That is one reason why SCM is becoming a key
competitive weapon.
What is SCM …….
Supply Chain Management is a hot topic in business today. The idea is to
apply a total systems approach for managing the entire flow of information ,
materials , and services from raw materials suppliers through factories and
warehouses to the end customer. Managing this complete operation is called
as SCM.
Why SCM is hot topic today and tomorrow : There are many companies
achieving significant competitive advantage by the way they manage their
supply chain operations. Thus SCM consists of developing a strategy to
organize, control, and motivate the resources involved in the flow of services
and materials.
It is probably one of the most important functions in current business
The unwavering focus on the customer and changing customer demands has
made the role of SCM function very critical.
Functions involved in SCM
Generally SCM is a very big team , consist of following major

functions.
• Procurement / Purchase ( Domestic & Imports )

• Materials Planning ( PPC )
• Warehouse / Stores
• Logistics ( Inbound & Outbound ), Excise & Dispatch
• Functional Excellence / Projects
• Sourcing / Development
Let us discuss various definitions of Supply Chain Management:
• The process from purchasing of raw materials and components ( from suppliers ) to
receipt, inventorying , manufacturing and storage of in-process and finished goods to the
distribution of the FG’s is one continuous or integrated system , where the material flows
from the external suppliers to The customers of the product. All activities involved in
this flow form the role of SCM.
• SCM is integration of various activities encompassed by the supply chain through

improved supply chain relationships to achieve a sustainable competitive advantage.
SCM is an essential aspect of business today. The idea is to apply a total systems approach
for managing the entire flow of information , materials , and services from raw materials
suppliers to the end customers.
• Consider how the materials might flow from a company’s suppliers , through the co’s
operations and then on to it’s customers. An increasingly popular perspective today is to
view the flow of materials from suppliers all the way to customers as a system to be
managed. This perspective is commonly referred to as SCM
Supply Chain for typical mfg organization
A supply chain is a sequence of suppliers, warehouses , operations and retail outlets.

Different companies may have different supply chains due to the nature of their operations
and whether they are primarily a mfg operation or a service operation. Bellow is the typical
supply chain for mfg organization.
Supplier 1,2, 3 storage Mfg W/H Dist. Retailer Customer
There has been a great deal of interest recently in industry and academics in the subject of SCM.
The reasons for this are …..
• The total time for materials to travel through the entire SC can be quite long ( say 4/6 months).
Since the materials spend so much time waiting in inventory , there is a great opportunity to
reduce the total SC cycle time leading to a corresponding reduction in inventory , increased
flexibility , reduced cost and better deliveries.
• Many companies have drastically improved their internal operations and now find it necessary
to consider relations with external customers and suppliers in the SC to gain further
improvements in their operations.
• SC thinking is an application of systems thinking and provides a basis for understanding
processes that cut across company’s internal departments and processes that extend outside
the company as well.
Objectives of Supply Chain
The main objectives of Supply Chains are …….
• To maximize the overall value business generates : The value a supply chain generates
is the difference between what the final product is worth to the customer and the effort
the supply chain expends in filling the customer’s request.
• To achieve maximum supply chain profitability : Supply chain profitability is the total
profit to be shared across all supply chains stages.
• To reduce the supply chain costs to the minimum possible level.
Supply chain management involves the management of flows between and among stages
in a supply chain to maximize total profitability.
Materials Planning ….
The main role is to act as a catalyst between Marketing / Sales / Distribution,

Shop / Assembly and Procurement team. Planning is responsible for
compiling all the requirements from Marketing and give commitments to
them.MRP run is a most important activity and responsibility of Planning.
Major KPI’s (Key Performance Indicators) are as follows ….
• On Time Delivery of Products / Services to Customers.

• Measuring the Delivery Performance against commitment.
• Inventory Control of overall operations.
• Inventory Turns
• Running of MRP as per the decided frequency
• Co-ordination of material procurement , shop operations and
Order Fulfillment as per commitment to Marketing.
• Number of Improvement Projects / Six Sigma Projects
Domestic / Imports Procurement
The function of Procurement is to ensure timely procurement of Parts /
Components from Suppliers and to carry optimum Inventory. Where ERP is in
place , the PO’s are released automatically through MRP & System. The
Buyers role is to ensure on time availability of Parts to Line / Shop / Assembly.
The main KIP’s for this Function are as Follows …
• RFT ( Right First Time ) of Parts availability to Line & Shop

• Supplier Delivery Performance
• Premium Freight
• Inventory in warehouse / stores
• Cost Reduction
• HSE Projects
• Improvement Projects / Six Sigma
• Risk management
Warehouse / Stores
The main functions involved are Material receipts , Unloading , counting ,
storage and issue of Parts / Raw materials. It’s also called as heart of transactions
Particularly for Engineering / Manufacturing industries. It has following KPI’s …
• Stock Accuracy / Inventory accuracy

• Schedule Cycle Counts
• GRR Posting Red Channel & Green Channel
• Posting pending report (aging)
• On time issue of material to Shop / Line. VOC
• Space utilization ( Cubical and Floor )
• Timely documentation & reconciliation of stocks.
• Safety & EMS Projects.
• RTV ( Return to vendor ) / Rejection operations efficiency (aging)
• Losses due to improper storage / handling (FIFO)
• Dock to Stock time reduction
• Number of Receipts and Issues in a day.
Logistics, Excise & Dispatch
The main functions involved are providing effective Logistics arrangements , both
for incoming materials (Inbound) and for shipping Finished products (Outbound),
planning and ensuring daily shipments to customers as per marketing / sales
shipping instructions and to prepare Excise documentation as per government rules
It has following KPI’s …
• On time & safe deliver of finished products to customers / dealers / distributors

• Ensuring daily shipments as per business requirements
• Providing logistics for material receipt from suppliers ( Milk run )
• Ensuring Safety of products & employees while loading of Products.
• Defect free excise documentation
• Preservation of Excise documents as per organization’s norms.
• Monthly reporting of Excise details to government authorities.
• Reviews & Audits.
Strategic Sourcing
In recent times this function has got immense importance due to cost competitiveness
and customers increasing expectations on Quality. Following are some of the major
KPI’s …
• Development of Suppliers , having WC facilities and quality certifications

• To finalize the Price of the Components.
• Development of Components along with all Quality & Cost norms of an organization.
• Working with Suppliers to increase the capacities.
• Technological development of Suppliers.
• Process improvements at Supplier end to ensure zero defect products.
• Cost reduction initiatives
• Quality Audits at supplier end
• Global sourcing & resourcing
• Improvement Projects.
4) Inventory Fundamentals – Aggregate Inventory management, Item Inventory

management, Inventory and flow of materials, supply-demand patterns, functions of
inventory, Objectives of inventory, Financial statements and inventory, ABC
Inventory control, JIT, Role played by inventories in supply chain. Order Quantities –
Economic Order Quantity (EOQ), Variations of EOQ model, Quantity Discounts,
Period Order Quantity Economic Lot Sizes Vs Practical Constraints – Follow up
difficulties, Suppliers minimum order quantity requirements, lead time, Government
regulations, packing restrictions, Seasonal availability, shelf life, space constraint,
how practical order
quantities are arrived at. Know your lead time – meaning Importance elements, its
major parts, control and estimation –6 Sessions
Inventory Management
The term “Inventory” originates from the French word “inventaire” and Latin word
“Inventariom” , which implies a list of things found. The term inventory has been
defined by several authors.
The more popular of them are the term inventory includes materials- Raw , In Process,
Packaging , spares , and others stocked in order to meet an unexpected demand for
distribution in future. Another definition of Inventory : It can be used to refer to the
stock on hand at a particular time of RM’s , goods in process of Manufacture , FG’s ,
and the like tangible assets which can be seen , measured and counted ….
Yet another definition is that the term inventory includes the following categories of
items:
1) Production Inventories – Raw Materials , Parts and components which enter the
firm’s product in the production process.
2) MRO Inventories -- Maintenance , repair and operating supplies which are
consumed in the production process but which do not become part of the product
3) In-Process Inventories – Semi-Finished products found at various stages in the
production operation.
4) Finished goods Inventories – Finished Product ready for shipment.
Objectives of Inventory Management :
1) Ensure a continuous supply raw materials and supplies to facilitate uninterrupted

production.
2) Maintain sufficient – Finished goods for smooth sales operations and efficient
customer service.
3) Inventories permit the procurement of RM’s in economic lot sizes as well as
processing of these RM’s into FG’s is the most economical qty known as “ELS”
( economic Lot Size )
4) Reduced dependencies of one another and enable the organizations to schedule
it’s operations independently.
5) Inventory Management helps to reduce material handling costs.
6) It helps to utilize people and equipment reasonably.
7) It facilitates product display and service to customers.
Inventory Costs : Inventories cost money. The cost factor must be considered while
taking any decision regarding inventories. Inventory cost includes ordering cost ,
carrying cost , out of stock or shortage cost and capacity cost. The details are as
follows.
1) Ordering Costs : A) Cost of placing an order with a vendor of materials –

Preparing PO , processing payments , receiving & inspecting the material. B)
Ordering from the plant – Machine set up , start up scrap generated from
getting a production run started.
2) Carrying Costs : A) Costs connected directly with materials – Obsolescence,
deterioration & pilferage B) Financial coats – Taxes , Insurance , Storage and
Interest.
3) Out of stock cost : A) Back ordering & B) lost sales.
4) Capacity Costs : A) OT payments when capacity is too small & B) Lay-offs and
idle time when capacity is too large.
Benefits of Inventory management & Control : It ensures an adequate supply of
materials and minimizes inventory costs. Proper management and control of
inventories will result into following benefits to organization.
• Inventory control ensures an adequate supply of materials , stores etc , minimizes

stock-outs and shortages and avoids costly interruptions in operations.
• It keeps down investment in inventories & Inventory carrying costs.
• It provides a check against the loss of materials through carelessness and pilferage.
• It serves as a means of the location and disposition of inactive and obsolete items
of stores.
• Perpetual inventory values provide a consistent and reliable basis for preparing
financial statements.
• It helps in improving the reliability of supply chain of an organization.

Steps to install a scientific inventory control system :
The installation of a scientific inventory control system involves the use of six basic
steps :
• Selective treatment of items to establish relative importance of the items in lieu of
expenditure incurred on them per period.
• Fixation of EOQ’s to determine ideal (theoretical) lot sizes to strike an optimum

balance between the cost of carrying stocks and the cost of procuring stocks.
• Rationalization of EOQ’s to modify them in light of practical difficulties faced by

the purchase , stores & receiving departments.
• Fixation of operating levels to enable the operating personnel in stores and

purchase department to know when to order and how much to order.
• Installation of the inventory control system to meet the desired objectives.
• Performance appraisal to take stock of actual achievements against expected gains

and thereby to introduce necessary changes in the model.
Selective treatment : Selective control means variations in the method of control from
item to item based on selective basis. The criterion used for this purpose may be cost
of item , criticality , Supplier lead time , consumption pattern , procurement difficulties
, or something else. Various classifications are employed to render selective treatment
to different types of materials, where each classification emphasizes on particular
aspect. For example ABC analysis emphasizes on usage value (i.e. consumption of the
item in terms of money) , VED ( Vital-Essential- Desirable), analysis considers criticality ,
where as FSN (Fast-Slow-Non-moving) emphasizes on issue pattern of the items.
Types of Classification Criterion Employed

1) ABC analysis Usage Value (Consmpn X Value / pc)
2) HML analysis (High-Medium-Low) Unit price only (no consumption)
3) VED analysis (Vital-Essential-Desirable) Criticality of items only considered.
4) GOLF (Govt-Ordinary-Local-Foreign) Source of procurement
5) FSN (Fast-Slow-Non-moving) Issue pattern from stores
6) SOS (Seasonal-of-seasonal) Seasonality
7) XYZ analysis Inventory investment
ABC Analysis : ABC analysis underlines a very important principle …… “
Vital few : trivial many”.
Statistics has proved that just a handful of items account for bulk of the annual
expenditure on materials. These few items are called as “ A class “ items , therefore hold
key to business. The other items are known as “B” and “C” items , are numerous in
number but their contribution to expenditure is less significant. ABC analysis thus ,
tends to segregate all items into three categories : A, B & C on the basis of their annual
consumption value (usage value). This categorization helps the organizations to pay the
right amount of attention for the right item.
A Class items : It is usually found that hardly 5-10 % of the total items account for 70-
75% of the total money spent on materials. These items require detailed and rigid
control and need to be stocked in smaller quantities. These items are to be procured
very frequently.
B Class items : These items are generally 10-15% of the total items and represent 10-
15% of the total expenditure on the materials. These are intermediate items and control
on these items need not be as detailed & rigid as that of A class items.
C Class items : These are numerous , as many as 70-75% of total items , but they
contribute to hardly 5-10% of the total annual expenditure on materials. The
procurement policy for these items is exactly opposite to that of a class items. These
items are to procured infrequently and in sufficient quantities.
Following procedure is suggested for developing an ABC analysis.
1) Prepare the total list of items and estimate their annual consumption.
2) Determine unit price (or cost) for each item.
3) Multiply each annual consumption by it’s unit price to get annual consumption
value for each item.
4) Arrange items in descending order of their annual usage starting with highest
annual consumption value down to the smallest value.
5) Calculate cumulative usage values and their percentages . Also express the
number of items into cumulative item percentages.
6) Graph cumulative consumption value percentages against cumulative item

percentages , and segregate all items into A,B and C categories.
Percent of total annual consumption value
100
80
C class items
A class items
B class items
40
20
0 10 20 30 100
Percent of total number of inventory items

FSN ( Fast moving-Slow moving-Non moving ) analysis : FSN analysis is based
only on the consumption figures of the items from the stores issue area. These
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 lapsed since the last
movement is recorded. Such an analysis helps to 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. The last two categories are
reviewed further to decide on disposal actions to deplete the inventory.
This analysis is very useful in controlling the obsolescence, which is a major area
of concern for all organizations.
Fixed order quantity system or “Q” system :
Means where , the fixed quantity of materials ordered whenever the stock on hand
reaches the re-order point. The fixed quantity of material is ordered each time is
nothing but the EOQ. When the new consignment arrives , the total stock ( existing
+ new arrival ) shall be within the maximum and the minimum limits.
Fixed order period system or “P” system :
In this system, inventory is ordered best on fixed period. Where stock position of
each item of material is regularly reviewed. When the stock level of given item is
not sufficient to sustain the production operation until the next scheduled review ,
an order is placed replenishing the supply. The frequency of reviews varies from
firm to firm. It also varies among materials within the same firm , depending upon
the importance of the material , specific production schedules , market conditions
and so forth.
EOQ : ( Economic Order Quantity ) – ( Definition )
EOQ is the level of Inventor Order of which Inventory cost is minimum. As seen earlier
under the Q system of inventory management , an order for supplies is placed when
the existing stock reaches re-order point. The relevant question now is – What should
be the size of ht order ? Buying in large quantities has it’s own problems , but of the
problems associated with bulk buying is the high ICC ( Inventory carrying cost ) Similarly
buying in small quantities reduces holding cost but adds to ordering cost. Consequently
, the materials manager is torn between a desire to keep inventories low by ordering in
small quantities and a desire to reduce the cost by buying large quantities.
Assumptions for EOQ Model :
EOQ can be worked out with the help of a mathematical formula. Following
assumptions are implied in the calculations –
1) Demand for the product is constant and uniform through-out the period.
2) Lead time ( time from ordering to receipt ) is constant.
3) Price per unit of product is constant.
4) Inventory holding cost is based on average inventory.
5) Ordering costs are constant.
6) All demands for the product will be satisfied ( no back orders are allowed ).
Graphical representation of the model :
Procurement cost per period ( the product of number of orders and procurement cost
per order ) varies with the number of replenishment. The procurement cost is high if
the item is procured frequently in small lots and is less if the item is procured less
frequently and in big lots.
Inventory carrying cost ( the product of average inventory investment and the
carrying cost ) on the contrary falls when the quantity ordered per batch is small
because of low capital investment.
The two costs , therefore , are diametrically opposite to each other. The right quantity
to order will be the one that strikes at optimum balance between these two opposite
costs. When the costs have been balanced , the total cost is minimum and the
resultant quantity is termed as EOQ.
Mathematical treatment of the model :
The symbols used are as follows –
• Annual consumption of the items (units) – S

• Unit Price (Rs) – Cu
• Order Qty (units) – q
• Procurement cost / order cost (Rs) – Cp.
• Inventory carrying cost as a % of average inventory investment – i
• Economic order quantity- qo = 2 X S X Cp / Cu X i
Mathematical formula for EOQ = qo
2 X Annual Reqdt X Procurement Cost

Price / Unit X Inventory CC
EQO calculation illustration : A co uses 75 numbers of an item per month. Each

unit costs the co Rs. 25/- . The cost of putting through each order and inventory
carrying charges per month are computed at Rs.36/- and 1.5% of the average
inventory investment respectively.
In what economic lots should the items be purchased to minimize total cost ??
Now, S = Annual Consumption 75 X 12 = 900 Numbers

Cp= Procurement cost per order (Rs) = Rs.36.00
Cu= Price per unit (Rs) = Rs.25.00
i= Inventory Carrying cost / Year = 1.5 / 100 X 12 = 0.18
Now qo = 2 X 900 X 36
25 X 0.18
= 120 Numbers
EOQ calculations methodology , when ICC is “ Rs per unit “ in place of “ % ICC “
The EOQ formula undergoes a small change as under :
qo = 2 X S X Cp / Cu X i
Where i = ICC (decimals)

Cu = Price / Unit
Ch = ICC per unit per year = Price / Unit X ICC per year ( decimals) = Cu X i
Replacing Cu X i by Ch , we get the alternate formula for EOQ. Therefore
qo = 2 X S X Cp / Ch
illustration of above formula for calculating EOQ :
Impellers are produced by the water pump manufacturer from a local firm and
are consumed at an average rate of 500 nos / per month. If the procurement
cost is Rs. 36.00 per order and cost of holding the stock is Rs. 1.20 per unit per
year , determine the quantity that should be procured at a time to optimized
the cost involved.
2 X S X Cp / Ch
qo =
Where S = Annual consumption = 500 X 12 = 6000

Cp = Procurement cost per order = 36.00
Ch = Inventory carrying cost per unit / year = 1.20 , substituting the
values , we get
qo = 2 X 6000 X 36 / 1.20 = 600 Numbers.

Economic Order Quantity (EOQ) with quantity discounts : Basic EOQ formula is based
on the assumption that price per unit is fixed irrespective of the order quantity. This is
not always true. Often , suppliers offer discounts if higher quantities are purchased.
Quantity discounts reduce materials cost and procurement cost but increase
investment in inventories ( i.e. ICC ). A decision therefore is to be made whether the
buyer should stick to the EOQ or raise the same to take advantage of the discount.
Theory Involved : EOQ formula established under the basic EOQ model is based on the
assumption that the price per unit is fixed irrespective of the quantity ordered. That is
why total cost function then was assumed to be uniformly continuous. However if the
price per unit is variable ( as in case of a qty discount situation ) , the total cost
function no longer remains uniformly continuous but becomes stepwise continuous.
This implies that in order to establish optimum quantity , we must investigate on local
minimums some of which may occur at price break level while others may occur
within a price range.
In lieu of step wise continuous nature of the total cost function , while making
comparison on the basis of annual total cost , we must also consider annual material
cost ( S X Cu ) into the cost calculations. Therefore , the general formula for the annual
total cost becomes – ATC ( Annual Total Cost ) ,
ATC = S X Cu + S/q X Cp + q/2 X Cu X i ,
Procedural Steps involved :
1) Calculate EOQ at different price levels.

2) Decide the quantity to be purchased at each price level. This equals EOQ or price
break quantity. The later being necessary if EOQ at a particular price level works out
to be lower than corresponding price break quantity.
3) Calculate annual total cost including annual material cost at the quantities fixed
under step II.
4) Select an optimal purchase quantity , this being one which entails the lowest
annual total cost.
An illustration on the model :
A manufacturer of a hand grinder requires a special roller bearing @ 300 numbers

per year. Each bearing costs the company Rs. 36.00 The procurement cost and the
inventory CC have been calculated @ Rs. 30.00 and 20% respectively.
If the supplier offers a discount of Rs.2.00 per bearing on an order of 200 or above ,
should higher quantity be purchased ??
Solution : From the data given above – S = Annual consumption = 300 Numbers
Cp = Procurement cost / Order = 30
Cu1= Basic price / unit = 36.00
Cu2= Discounted price / unit = 34.00
i= Inventory CC (decimals) = 0.20
The above prices are valid for the following quantities –

Price Range of Qty
Rs. 36.00 0< q < 200
Rs. 34.00 200 < q
The procedural steps to determine optimal order quantity are as under :
Step 1)
“Calculate EOQ at different price levels” EOQ at these two prices have been
computed and tabulated as follows :
Price Rs. Range of purchase EOQ Quantity to be purchased

Qty ( q ) at the indicated price.
Rs.36 o<q<200 Sq.Root 2XSXCp / Cu1Xi 50 Numbers.

= SR. 2X300X30 / 36X0.20
= 50
Rs.34 200< q SR 2XSXcp / Cu2 X i 200 Numbers
= SR. 2X300X30 / 34X0.20
= 51
Step 2) “ Calculate annual total cost including annual material cost at the
quantities fixed ”. Table below shows annual total cost calculations which are self
explanatory.
Cost Elements -- Order Quantity --
50 200
1. Annual cost of materials 300X36 300X34
(SXCu) = 10,800 = 10,200
2. Annual procurement cost 300 / 50 X 30 300 / 200 X 30

(S/qXCp) = 180 = 45
3. Annual ICC 1/2X50X36X0.20 1/2X200X34X0.20

(1/2 X q XCuX i ) = 180 = 680
Therefore annual total cost (1+2+3) = Rs 11,160 = Rs 10,925
Step 3) “ Select an optimal purchase quantity “ :
From the annual total cost figures calculated above , we find the cost incurred is the
least when quantity purchased is 200 numbers. Therefore, EOQ = 200 Numbers.
An illustration of ABC analysis : Mathematical treatment --

Computerization of materials management

Use of IT in Supply Chain


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Operations Management & Supply Chain

Management (SCM) -- Subject Code: 0406

1) The Manufacturing Function –What Is manufacturing/production? Operations

2) Manufacturing Systems – Components of the manufacturing system –Input-

3) Introduction to Materials Management – What is materials management? ,

4) Inventory Fundamentals – Aggregate Inventory management, Item Inventory

5) Computerization of materials management – Introduction, benefits of computer

6) Importance of IT in Supply chain, Benefits of IT in supply chain – 3 Sessions

1.Manufacturing & Operations management – L C Jhamb

2.Introduction to Materials Management – Tony Arnold, Stephen Chapman

3.Inventory management - L C Jhamb

1) The Manufacturing Function –What Is manufacturing/production? Operations Concept

Introduction to Production Management:

Manufacturing is refers to the process of producing only tangible goods, where as

2) Process selection & Planning : Selection of the optimal “ conversion system “ is as

7) Inventory Control : Inventory control deals with determination of optimal inventory

8) Quality Assurance & Control : Quality is an important aspect of production system

• Improved work environment

10) Maintenance & Replacement : This involve selection of optimal maintenance

2) Manufacturing Systems – Components of the manufacturing system –Input-

Types of Production System- Continuous ,intermittent, Job lots etc.

• It must be able to meet the specifications of the final product

• It must be cost effective.

1) Project Production: Where a single assignment of complex nature is undertaken

2) Jobbing Production: Where one or few units of a product are produced to

5) Continuous / Process Production: Where production run is conducted for an

Characteristics of project production:

• Definite beginning & definite end

Characteristics of Jobbing Production:

• Small Production runs

Characteristics of Batch Production:

Characteristics of Mass & Flow Production:

• Continuous flow of material

Characteristics of process production :

• SPM’s with built-in controls

Various factors which determines the choice of manufacturing process:

1) Strategic ( Long-term ) decisions

2) Tactical ( Intermediate-term ) decisions

3) Operational Planning & Control ( Short-term ) decisions

• Flexibility & New Product Introduction Speed : “ Change It “ It’s an ability of an

• The other word synonymously used with production is

Introduction to Materials Management – What is materials management? The supply

The integrated approach of materials management is SCM ( Supply Chain Management )

Overview of Supply Chain

Typically the manufacturers may spend 60 to 70 % of the total sales revenue on

It is probably one of the most important functions in current business

Generally SCM is a very big team , consist of following major

• Procurement / Purchase ( Domestic & Imports )

Let us discuss various definitions of Supply Chain Management:

• SCM is integration of various activities encompassed by the supply chain through

A supply chain is a sequence of suppliers, warehouses , operations and retail outlets.

Supplier 1,2, 3 storage Mfg W/H Dist. Retailer Customer

The main objectives of Supply Chains are …….

• To reduce the supply chain costs to the minimum possible level.

The main role is to act as a catalyst between Marketing / Sales / Distribution,

• On Time Delivery of Products / Services to Customers.

• RFT ( Right First Time ) of Parts availability to Line & Shop

• Stock Accuracy / Inventory accuracy

Logistics, Excise & Dispatch

• On time & safe deliver of finished products to customers / dealers / distributors

• Development of Suppliers , having WC facilities and quality certifications

4) Inventory Fundamentals – Aggregate Inventory management, Item Inventory

Objectives of Inventory Management :