Material Management: Inventory Control & QC Techniques

Material Management: Inventory Control & QC Techniques

1. SNIST (JNTUH) – B.Tech UNIT III MATERIALS MANAGEMENT Dr. S. VIJAYA BHASKAR Professor in Mechanical Engineering Sreenidhi Inst. of Science and Technology, Hyderabad

2. UNIT – III: MATERIALS MANAGEMENT Objectives of Materials Management Inventory Control Need for Inventory Control ABC Analysis Economic Order Quantity Just In Time Introduction to LSCM (Logistic Supply Chain Mgmt) Quality Control Techniques Introduction to SQC Inspection, ISO standards Six Sigma.

3. UNIT – III MATERIALS MANAGEMENT EOQ CARR Y I N G C O S T P UR C H A S I N G C O S T

4. In 5 M’s of Industrial Organizations, the Materials is a major factor Men Machines Money Materials Methods

5. MATERIALS MANAGEMENT Materials Management is defined as the management of the flow of ( raw ) materials into an organization to the point, where, those materials are converted into the firm’s end product (s) – Bailey and Farmer Therefore, Materials Management refers to the movement of production materials , from the stage of this acquisition to the stage of their consumption.

6. The fundamental objectives of the Materials Management, often called the famous 5 Rs (TQQPS) of Materials Management, are  Providing the Required Material at the Right T ime in Right Q uantity of Right Q uality at Right P rice from the Right S ource

7. Primary Right price High turnover Low procurement & storage cost Continuity of supply Consistency in quality Good supplier relations Development of personnel Good information system Objective of Material Management Secondary Forecasting Inter-departmental harmony Product improvement Standardization Make or buy decision New materials & products Favorable reciprocal relationships

8. Objectives of Material Management T he key objectives of MM are : To buy at the lowest price , consistent with desired quality and service  To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory losses occurring due to deteriorations, obsolescence  and pilferage  To maintain continuity of supply , preventing interruption of the flow of materials and services to users  To maintain the specified material quality level and a consistency of quality which permits efficient and effective operation  To develop reliable alternate sources of supply

9. To minimize the overall cost of acquisition by improving the efficiency of operations and procedures   To hire, develop, motivate and train personnel and to provide a reservoir of talent    To achieve a high degree of cooperation and coordination with user departments   To maintain good records and controls that provide an audit trail and ensure efficiency and honesty   To participate in Make or Buy decisions

10. INVENTORY CONTROL “The term inventory includes materials – raw, in process, finished packaging, spares and others stocked in order to meet an unexpected demand or distribution in the future.” Inventory control is defined as the scientific method of providing the right type of material at the right time in the right quantities and at the right price to sustain the given production schedules.

11. NEED FOR INVENTORY CONTROL Minimize investments Maximize service levels Supports the production departments Avoids increase of Work in Progress ( WIP ) Has an impact on overall profitability of the enterprise

12. B ENEFITS OF I NVEN T O R Y C ON T R OL Ens ures a n ade q uat e sup p ly of ma t erials Minimize s i n ven t ory c o sts Facilitates purc h asin g eco n omies Eliminates du p licati o n i n or d ering Bet t e r utilizati o n of availabl e st o cks P rovi d e s a chec k agai n st th e lo s s of mat e rials Facilitates cos t accounti n g activities Ena b les mana g emen t i n cos t com p arison L o cate s & dis p os e s inac t iv e & o b so l et e st o re ite m s Consisten t & reliable basi s for financial statemen t s

13. INVENTORY CONTROL TECAHNIQUES/MODELS

14. ABC ANALYSIS The ABC (Always Better Control) Analysis is a means of categorizing inventory items into three classes ‘A’, ‘B’ and ‘C’ according to the potential amount to be controlled. A – Very costly inventory B – Moderate/Less costly inventory C – Least costly inventory

15. ABC ANA L Y SIS (ABC = Al w a y s B e tt er Co n t r ol) Thi s is b ased on co s t cri t e ria. It h e lps t o e x e r ci s e sel ecti v e cont r ol w h e n con f r on t e d wit h la r g e nu m ber of i t e m s It r a tional i z e s the n u mb e r of o r d e r s , n u mb e r of i t em s & r e d uce the i n v en t or y . A b o u t 10 % of m a t e rial s Consume 70 % of r e sou r ces A b o u t 20 % of m a t e rial s co n s um e 20 % of r e sou r ces A b o u t 70 % of m a t e rial s co n s um e 10 % of r e sou r ces

16. P ROCED U RE FOR A B C A NA L YSIS List al l it e m s of inven t or y De t ermin e t h e annua l v olume of usag e and mone y value of ea ch it e m Mul t iply each item ’ s annual volume by its price C o mpu t e ea c h ite m ’ s percen t age of the t otal inventory in t e rms of annua l usag e in terms of Cost Sele ct the to p 10 % of al l item s whic h hav e the highest rupee percen t ages & classify them as “A” items. Sele ct the ne xt 20 % of al l items wit h the ne xt hig h est rupee percen t ages & designa t e them “B” items. The nex t 70 % of al l item s wit h th e l o wes t price percen t ages are “C” items.

17. A items Small in numbe r , but consum e la r g e amou n t of r esou r ces Mu s t h a v e : • Tig h t cont r ol of Inventory • R igid e s tim a t e of r e qu i r e me n ts • Strict and c lo s er wa t ch of items • L ow s a f e ty s t oc k level • Supervised and managed b y t op mana g e m e n t

18. B items INTERMEDIATE/Moderate in numbe r and consum e Moderate amou n t of r esou r ces Intermediate ‡ Must have: Moderate control Purchase based on rigid requirements Reasonably strict watch & control Moderate safety stocks Managed by middle level management

19. C items L a rg er in nu m be r , but co n s um e less e r amo u n t of r e sou r c e s Mu s t h a v e : • O r di n ar y cont r ol m e asu r e s • P u r c h ase ba s ed on usa g e e s tim a t e s • Hi g h s a f ety s t oc k s ABC anal y sis d o e s not s t r e ss on i t e m s th o se a r e l e ss co s tly but m a y b e vi t al

20. ABC Classification Fig 1 Fig 2

21. A D V AN T AGES OF A B C A NA L YSIS Help s t o exercis e selective co n trol Give s rewarding results quickly Help s t o poi n t out o b sole t e st o ck s easil y . In case of “A” items careful atte n tion can be paid a t ever y step such a s estimat e of re q uirements, purc h ase , safety st o ck , receipts, ins p ecti o ns, issues , etc . & clos e co n tro l i s maintaine d . In case of “C” items, recording & foll o w up, etc. ma y b e dispe n sed wit h or com b ined. Help s be t te r pla n nin g of invent o ry co n trol P rovi d e s s o u n d b a sis for allocati o n of fun d s & huma n resources.

22. D ISA D V AN T AGES OF A B C A NA L YSIS P ro p e r stan d ardizatio n & co d ificatio n of invent o ry ite m s n ee d e d . Consider s only mo n e y value of i t em s & ne g lects th e imp o rtance of i t em s for th e pr o duc t ion pr o ces s or assembl y or func t io n in g . P erio d i c revi e w b e c o me s di f ficult i f o nl y ABC analysi s i s recalled. W h e n other imp o rtant factors mak e i t o b liga tory to co n centrate on “ C ” items more , the pur p ose of ABC analysi s i s d e feat e d.

23. ECONOMIC ORDER QUANTITY (EOQ) EOQ is defined as that quantity of material, which can be ordered at one time to minimize the cost of ordering and carrying the stocks. It is the order size at which the total cost, comprising ordering cost plus carrying cost , is the least . TYPES OF INVENTORY COSTS Ordering (purchasing) costs Inventory carrying (holding) costs Out of stock/shortage costs Other costs ORDERING COSTS It is the cost of ordering the item and securing its supply. Includes-Expenses from raising the indent, Purchase requisition by user department till the execution of order and Receipt and inspection of material INVENTORY CARRYING COSTS Costs incurred for holding the volume of inventory and measured as a percentage of unit cost of an item. It includes- Capital cost , Taxes , Insurance cost, Storage & handling cost

24. E CO N OMIC O RDER Q UA N TITY (EOQ) EOQ or Fixed Order Qua n tit y system i s the tec h ni q u e of or d erin g mat e rials whe n eve r st o ck reaches th e reorder p o int. Ec o nomi c or d e r qual i t y deal s whe n th e cos t of pr o curemen t an d han d ling of invent o ry ar e at o p tim u m le v e l an d t o ta l cos t i s mini m um. I n thi s tech n iq u e , th e order qua n tit y i s larger than a sin g le peri o d r eq u irement so that or d erin g cost s & hol d in g cos ts bala n c e ou t .

25. EOQ CARR Y I N G C O S T P UR C H A S I N G C O S T E C O NO M I C O RD ER Q UAN T I T Y ( E O Q )

26. A SSUMP TIONS OF EOQ Deman d f o r th e pr o duc t i s co n stant Lea d ti m e i s c o ns t ant P rice pe r uni t i s co n stant Inventor y carryin g cos t i s base d on average inven t ory Orderi n g cos t s ar e c o ns t an t p e r or d er All d eman ds for th e prod u c t wil l b e satisfied (no bac k o rders)

27. W EAKNESS E S OF EOQ FORMULA Erratic usag es Faul t y b a sic informa t ion Costl y calculati o ns N o f o rmula i s subs t itu t e for commo nsense EOQ or d erin g mus t b e tempere d wit h ju d gme n t

28. VARIABLES OF EOQ A or U= Annual Demand S= Size of each order (units per order) O= Ordering or procurement cost per order C or I= Carrying cost per unit

29. Algebraic Method of determining EOQ: STEP -1: Find out the total ordering cost per year A * O  [ Annual Demand x Ordering Cost] S  Size of each order STEP -2: Find out the carrying cost per year S * C C  Carrying cost per unit 2 EOQ is one where total ordering cost is equal to total carrying cost A * O S * C S 2 Therefore, EOQ = √ (2AO/C) or √ (2U.P/C I)

30. PROBLEM: Given that Annual usage = 60 units Procurement cost P = Rs. 15 per order Cost per piece C = Rs. 100 Cost of carrying inventory I = 10% Calculate EOQ?

31. Q = Q = √ 2*60*15/100*0.1 = 13.41 Therefore, number of order per year=60/13.41=4.47 or 5 √(2U.P/C I)

32. JUST IN TIME (JIT) J I T i s a m a n u f a c t u ri n g s ys t e m wh o s e g o al i s t o o p t i m i ze p r o c e s s e s a n d p r o c ed u re b y c o n ti n u o u s l y p u rs u i n g w a s t e r e d u cti o n I t i s b oth a p h i l o s o p h y a n d a s et o f me tho d s fo r m a n u f a c t u ri n g . Even though i t has n o si n gl e , a g r eed- u p o n d efi n it i o n, J I T em p ha si zes wa s t e re d u cti o n , t o ta l q u a l i t y c o n t r ol , a n d de v o t i o n to th e c u s t o me r. The increase efficiency and decrease waste can be achieved by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires that producers are able to accurately forecast demand .

33. Just in time is a type of operations management approach which originated in Japan in the 1950s. It was adopted by Toyota and other Japanese manufacturing firms, with excellent results: Toyota and other companies that adopted the approach ended up raising productivity (through the elimination of waste) significantly.

34. JIT – 7 Wastages The JIT inventor: T oy ota M oto r C o m p an y id e n t i f i e d s e v en w ast e s in Operations as b e i n g t h e tar g e t s of c o n t i n u o us i m p r ov e m e n t in p r o d u c t i o n p r o c e s s . By reducing th e s e wa s te s , an i m p r o v em e n t in productivity can be a c h i e v e d . W a s t e of O v e r p r o d u ct i o n W a s t e of W a i t i n g W a s t e of T r a n s p o rtati o n W a s t e of P r o c e s s i n g i tse l f W a s t e of Inventory S t o ck s W a s t e of M o t i o n/Movement W a s t e of M a k i n g D e f e ctiv e P r o d u cts

35. Waste in Operations

36. Copyright 2006 John Wiley & Sons, Inc. 15- 39 Waste in Operations (cont.)

37. Copyright 2006 John Wiley & Sons, Inc. 15- 40 Waste in Operations (cont.)

38. Waste in Operations (cont.)

39. Waste in Operations (cont.)

40. 7 Wastes

41. Implementation of JIT – Three Elements

42. JI T I mp l eme n tat ion R e qu i remen t s: D e s i gn Flo w Process  L i n k o p erat i o n s  B ala nc e w o rk s t a t i o n c a p a c i t i e s  R e de s i g n layo u t fo r o p t i m u m f l o w  E m p ha si ze p re v e n t i v e ma i n te n a nce  R e d u c e lo t si z e s  R e d u c e s et u p / c h a n g e o v er t i m e

43. JI T I mp l eme n tat ion R e qu i remen t s: T o ta l Q u a li t y C o nt r o l  W o rk er r e s p o n s i b i l i ty  S Q C i n pla ce  E n f o r c e c o m pl i a nce  F ai l - s af e m e t h o d s (p o k a - y o k e )

44. JI T I m p l e m e n t a ti o n R e q u i reme n t s: W o r k w i th Ve n d o rs  R ed u c e l ead t i m e s  F re q u e n t d e l i v e r i e s  P r o j e c t u s a g e r e q u ir eme n ts  C l ear Qu al i t y e xp e ct a t i o n s

45. JI T I mp l emen tation R eq u i remen t s: R e d u ce ww w. a2 z m b a . com M o re In v e nt o r y  Lo o k fo r oth er are a s to red uc ed m ater i als  M i n i m i z e S t o re s  M i n i m i z e T r a n si t  C ar o u s e l s  C o n v e y o r s

46. JI T I m p l e m e n t a ti o n R e q u i r e me n t s: I m p r o v e ww w. a2 z m b a . com Pr o d u c t De s i g n S t a n d ard p r o d u c e c o n f i g u rat i o n S t a n d ar d i z e a n d re d u c e n u m b e r o f p a r ts A l i g n P r o c e s s d e si g n w i th p r o d u c t de s i g n Qu al i t y e xp e ct at i o n s

47. BENEFITS OF JIT Quality consciousness Reduced scrap Reduced cycle times Smoother flow of production] Low inventory High productivity High worker participation Reduced space requirements

48. Logistics and supply chain management (LSCM) Supply chain management, is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities.

49. LSCM-LOGISTIC SUPPLY CHAIN MANAGEMENT Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. It spans all movement and storage of raw materials , work-in-process inventory , and finished goods from point of origin to point of consumption .

50. 54 What Is Supply Chain Management (SCM)?

51. What Is Supply Chain Management (SCM)? A set of approaches used to efficiently integrate Suppliers Manufacturers Warehouses Distribution centers So that the product is produced and distributed In the right quantities To the right locations And at the right time System-wide costs are minimized and Service level requirements are satisfied 55 Plan Source Make Deliver Buy

52. Quality control Quality control (QC) is a procedure or set of procedures intended to ensure that a manufactured product or performed service adheres to a defined set of quality criteria or meets the requirements of the client or customer. Quality control ensures that defects and errors are prevented and finally removed from the process or product.

53. Quality control techniques Inspection ISO standard Six sigma

54. ISO standard The International Organization for Standardization known as ISO, is an  international standard -setting body composed of representatives from various national standards organizations . What is a standard? A standard is a document that provides requirements, specifications, guidelines or characteristics that can be used consistently to ensure that materials, products, processes and services are fit for their purpose. ISO published over 19 500 International Standards that can be purchased from the ISO store.

55. SIX SIGMA Six Sigma is a set of practices developed by Motorola to systematically improve processes by eliminating defects. It refers to the ability of highly capable processes to produce output within specifications. To achieve six sigma a process must not produce more than 3.4 defects per million opportunities. A six sigma defect is defined as anything outside the customer specifications.

56. SIX SIGMA

57. METHODOLOGIES DMAIC

58. METHODOLOGIES DMADV

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