ME404 INDUSTRIAL ENGINEERING

MODULE V

PRODUCTION PLANNING & CONTROL

(PPC)

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 CONTENTS
• Production planning and control
• Importance of planning
• Job, batch and mass production
• Introduction and need for a new product
• Product life cycle.
• Functions of production control.
• Routing
• Scheduling
• dispatching and
• follow up
• Gantt charts.
• Inventory Control
• Inventory models
• Determination of EOQ.
• Reorder level
• Simple problems.
• Selective inventory control techniques.
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 PRODUCTION PLANNING
• Production Planning can be referred to as a technique of forecasting
every step in the long process of production, taking them at right
time and in the right degree and trying to complete operations at
the maximum efficiency.
In the words of Kimball and Kimball Jr –
“The planning of industrial operations involves four
considerations, namely, what work shall be done, how
the work shall be done and lastly, when the work shall be
done.”

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 PRODUCTION CONTROL
Production control is the process that keeps a watchful eye on the
production flow and size of resources along with the location, of any
deviation from the present action and to arrange for the prompt
adjustment so that the production may run according to the original
or revised schedule

In the words of Henry Fayol –

“Production control refers to ensuring that all which
occurs is in accordance with the rules established and
instructions issued.”

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 PRODUCTION PLANNING & CONTROL

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 PPC CHARACTERISTICS
• Inputs like materials, men and machines are efficiently used

• Factors of production are integrated to use them economically

• Division of work is undertaken carefully so that every available element is

properly utilized

• Work is regulated from the first stage of procuring raw materials to the
stage of finished goods

• Questions like what, when and how to be manufactured are decided

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 PPC-OBJECTIVES

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 AREAS OF PRODUCTION PLANNING

• Preparation of production budget

• Devising manufacturing methods and sequence of operations

• Deciding type of machines and equipments

• Preparation of operation sheets and instruction cards

• Estimating men, machine and material requirements

• Undertaking time and motion studies

• Preparing master schedules

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 PPC PROCESS

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 PPC PROCESS

• Planning : What is the Task ?

• Routing : Where it needs to be carried out ?

• Scheduling : When it needs to be carried out ?

• Loading : Who will perform the task ?

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 PLANNING
• It is the first element of production planning and control.

• Planning means deciding in advance what is to be done in future.

• An organizational set up is created to prepare plans and policies.

• Various charts, manuals and production budgets are also

prepared.

• Planning provides a sound base for control.

• A separate department is set up for this work.

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 ROUTING
• Routing is determining the exact path which will be followed in production.

• It is the selection of the path from where each unit have to pass before
reaching the final stage.

• The stages from which goods are to pass are decided in this process.

In the words of ALFORD and BEATY –

“Routing is the specification of the flow sequence of operations and

processes to be followed in producing a particular manufacturing lot.”

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 ROUTING PROCEDURE
1. Deciding what part to be made or purchased.
2. Determining Materials required.
3. Determining Manufacturing Operations and Sequences
4. Determining of Lot Sizes.
5. Determining of Scrap Factors.
6. Analysis of Cost of the Product.
7. Preparation of Production Control Forms.

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 SCHEDULING
• Scheduling is the determining of time and date when each operation is
to be commenced or completed.

• The time and date of manufacturing each component is fixed in such a

way that assembling for final product is not delayed in any way.

“The determination of the time that should be required to perform each

operation and also the time necessary to perform the entire series, as
routed, making allowances for all factors concerned.”(Kimball)

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 TYPES OF SCHEDULES
• Master Scheduling – It is the breakup of production requirements. It is the
start of scheduling. It is prepared by keeping in view the order or likely
sales order in near future.

• Manufacturing Scheduling – It is used where production process is

continuous. The order of preference for manufacture is also mentioned in
the schedule for a systematic production planning.

• Detail Operation Scheduling – It indicates the time required to perform

each and every detailed operations of a given process
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 LOADING

• The next step is Loading which is execution of the scheduled

plan as per the route chalked out.

• It includes the assignment of the work to the operators at their

machines or work places.

• Loading determines who will do the work

 CONCEPT OF PRODUCTION

Production is defined as “The step-by-step

conversion of one form of material into another
form through chemical or mechanical process to
create or enhance the utility of the product to the
user.” Thus production is a value addition process. At
each stage of processing, there will be value addition.
 CONCEPT OF PRODUCTION
Edwood Buffa defines production as ‘a process by which

goods and services are created’.

Examples of production are:

Manufacturing custom-made products like, boilers with a specific capacity.

Constructing flats, some structural fabrication works for selected customers,

etc.

Manufacturing standardized products like, car, bus, motor cycle, radio,

television, etc.
 PRODUCTION vs MANUFACTURING

 Manufacturing is a process of converting raw material in to

finished product by using various processes, machines and
energy.
 It is a narrow term.
 Production is a process of converting inputs in to outputs.
 It is a broder term.
Every type of manufacturing can be production, but
every production is not a manufacturing.
PRODUCTION vs MANUFACTURING
 PRODUCTION SYSTEM
• The production system of an organization is that part, which
produces products of an organization.

• It is that activity whereby resources, flowing within a defined

system, are combined and transformed in a controlled manner to
add value in accordance with the policies communicated by
management.
SCHEMATIC PRODUCTION SYSTEM
Inputs: Transformation Outputs:
Process:
• Men • Product
• Materials • Product Design • Services
• Machines • Product Planning
• Information • Production Control
• Capital • Maintenance

Continuous:
• Inventory
• Quality
• Cost

Environment Feedback Information

 CLASSIFICATION OF PRODUCTION
SYSTEMS
Production systems can be classified as Job Shop, Batch, Mass and Continuous
Production systems.

Continuous
Production
Operations Volume

Mass
Production
Production /

Batch
Production
Job-Shop
Production

Output / Product Variety

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 JOB SHOP PRODUCTION
Job shop production are characterised by
manufacturing of one or few quantity of products
designed and produced as per the specification of customers
within prefixed time and cost.

The distinguishing feature of this is low volume and high

variety of products.
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 CHARACTERISTICS
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge
because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of
each product, capacities for each work centre and order priorities.

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 JOB SHOP PRODUCTION
ADVANTAGES LIMITATIONS
1. Because of general purpose 1. Higher cost due to frequent
machines and facilities variety set up changes.
of products can be produced. 2. Higher level of inventory at
2. Operators will become more
skilled and competent, as each all levels and hence higher
job gives them learning inventory cost.
opportunities.
3. Full potential of operators can 3. Production planning is
be utilised. complicated.
4. Opportunity exists for creative
methods and innovative ideas. 4. Larger space requirements.

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 BATCH PRODUCTION
Batch production is defined by American Production and
Inventory Control Society (APICS) as
“A form of manufacturing in which the job passes through the
functional departments in lots or batches and each lot may
have a different routing.”
It is characterised by the manufacture of limited number of
products produced at regular intervals and stocked awaiting
sales.
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 CHARACTERISTICS
Batch production system is used under the following circumstances:

1. When there is shorter production runs.

2. When plant and machinery are flexible.

3. When plant and machinery set up is used for the production of item
in a batch and change of set up is required for processing the next
batch.

4. When manufacturing lead time and cost are lower as compared to

job order production.

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 BATCH PRODUCTION
ADVANTAGES LIMITATIONS
1. Better utilisation of plant and 1. Material handling is complex
machinery. because of irregular and longer
2. Promotes functional specialisation. flows.
3. Cost per unit is lower as compared to
2. Production planning and control is
job order production.
complex.
4. Lower investment in plant and
3. Work in process inventory is higher
machinery.
compared to continuous
5. Flexibility to accommodate and
production.
process number of products.
4. Higher set up costs due to frequent
6. Job satisfaction exists for operators.
changes in set up.
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 MASS PRODUCTION
Manufacture of discrete parts or assemblies using a continuous
process are called mass production.
 This production system is justified by very large volume of
production.
 The machines are arranged in a line or product
layout.
 Product and process standardisation exists and all
outputs follow the same path.
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 CHARACTERISTICS
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production
capacities and output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without
any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
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 MASS PRODUCTION
ADVANTAGES LIMITATIONS

1. Higher rate of production with 1. Breakdown of one machine will stop

reduced cycle time. an entire production line.

2. Higher capacity utilisation due to 2. Line layout needs major change

line balancing. with the changes in the product

design.
3. Less skilled operators are
3. High investment in production
required.
facilities.
4. Low process inventory.
4. The cycle time is determined by the
5. Manufacturing cost per unit is low.
slowest operation.
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 CONTINUOUS PRODUCTION

Production facilities are arranged as per the sequence of

production operations from the first operations to the
finished product.

The items are made to flow through the sequence of operations

through material handling devices such as conveyors, transfer devices,
etc.

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 CHARACTERISTICS
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final
product.
5. Planning and scheduling is a routine action.

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 CONTINUOUS PRODUCTION
ADVANTAGES LIMITATIONS
1. Standardisation of product and 1. Flexibility to accommodate
process sequence.
2. Higher rate of production with and process number of
reduced cycle time. products does not exist.
3. Higher capacity utilisation due to
line balancing. 2. Very high investment for
4. Manpower is not required for setting flow lines.
material handling as it is completely
automatic. 3. Product differentiation is
5. Person with limited skills can be limited.
used on the production line.
6. Unit cost is lower due to high
volume of production.
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 NEW PRODUCT DEVELOPMENT
• New product development is an essential activity for all businesses.
• It helps you stay ahead of the competition.
• If you do not develop new products someone else will and steal all of your
customers.
• The number of businesses that have gone into administration during the current
world recession demonstrate the importance of change management.
Need of NPD
• Consumer needs and wants change.
• Product reaches the end of its product life cycle.
• Product is at the maturity stage of the product life cycle
• Environmental changes
• Competitors

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 NEED OF A NEW PRODUCT

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 NEW PRODUCT DEVELOPMENT

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 PRODUCT LIFE CYCLE

• As consumers, we buy millions of products every year. And just like

us, these products have a life cycle.

• Older, long-established products eventually become less popular,

while in contrast, the demand for new, more modern goods usually
increases quite rapidly after they are launched.

• The product life cycle has Four very clearly defined stages, each
with its own characteristics that mean different things for business
that are trying to manage the life cycle of their particular
products.
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 INTRODUCTION STAGE
• This stage of the cycle could be the most expensive for a company
launching a new product.

• The size of the market for the product is small, which means sales
are low, although they will be increasing.

• On the other hand, the cost of things like research and development,
consumer testing, and the marketing needed to launch the product
can be very high, especially if it’s a competitive sector.

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 GROWTH STAGE
• The growth stage is typically characterized by a strong growth in
sales and profits.

• The company can start to benefit from economies of scale in

production, the profit margins, as well as the overall amount of
profit, will increase.

• This makes it possible for businesses to invest more money in the

promotional activity to maximize the potential of this growth stage.

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 MATURITY STAGE
• During the maturity stage, the product is established and the aim for
the manufacturer is now to maintain the market share they have
built up.

• This is probably the most competitive time for most products and
businesses need to invest wisely in any marketing they undertake.

• They also need to consider any product modifications or

improvements to the production process which might give them a
competitive advantage.
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 DECLINE STAGE
• Eventually, the market for a product will start to shrink, and this is
what’s known as the decline stage.

• This shrinkage could be due to the market becoming saturated (i.e. all
the customers who will buy the product have already purchased it), or
because the consumers are switching to a different type of product.

• While this decline may be inevitable, it may still be possible for

companies to make some profit by switching to less-expensive
production methods and cheaper markets.
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 PRODUCT LIFE CYCLE
Particulars Introduction Growth Maturity Decline

High
Product Increasing Dominant Design
High Variety Standard
variety Standardization feature product
Commodity
Increasing
Decreasing
Volume Low Volume Volume High Volume
Volume
Consolidation
Industry Small Scale Medium Scale Few Large Scale
Survivors
Structure Companies Companies Companies

Form of Product Product Quality Price and

Price
Competition Characteristics and availability dependability
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 PRODUCT LIFE CYCLE EXAMPLES
• Introduction – 3D TVs
• Growth – Blue ray discs/DVR
• Maturity – DVD
• Decline – Video cassette

The idea of the product life cycle has been around for some time,
and it is an important principle manufacturers need to
understand in order to make a profit and stay in business.

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 FUNCTIONS OF PRODUCTION
CONTROL

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 DISPATCHING
• Dispatching refers to the process of actually ordering the work to be
done. It involves putting the plan into effect by issuing orders.

• It is concerned with starting the process and operation on the basis

of route sheets and schedule charts.

“Dispatches put production in effect by releasing and guiding

manufacturing order in the sequence previously determined by route
sheets and schedules.”(John A.Shubin)

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 DISPATCHING PROCEDURES
• Centralized Dispatching – Under this, orders are directly
issued to workmen and machines. It helps in exercising effective
control.

• Decentralized Dispatching – Under this procedure all work

orders are issued to the foreman or dispatch clerk of the
department or section. It suffers from difficulties in achieving
co-ordination among different departments.
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 INSPECTION
• Inspection is the process of ensuring whether the products
manufactured are of requisite quality or not.

• Inspection is undertaken both of products and inputs. It is carried on

at various levels of production process so that pre-determined
standards of quality are achieved.

• Inspection ensures the maintenance of pre-determined quality of

products.

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 FOLLOW UP & EXPEDITING
• Progress may be assessed with the help of routine reports or
communication with operating departments.

• The follow up procedure is used for expediting and checking the

progress.

“Follow up or expediting is that branch of production control

procedure which regulates the progress of materials and part
through the production process.”

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 CORRECTIVE MEASURES
• Adjusting the route.
• Rescheduling of work.
• Changing the workloads
• Repairs and Maintenance of machinery or equipment.
• Control over inventories.
• Certain personnel decisions like training, transfer, demotion etc.
• Alternate methods may be suggested to handle peak loads.

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 PPC : LIMITATIONS
• Assumption based
• Rigidity
• Difficult for small firms
• Costly
• Dependence on external factors
• Team work is a must
• Demands high level of co-ordination & efficiency
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 PPC : SIGNIFICANCE
• Structured & Planned Process
• Increased Production
• Seamless Plant Activity
• Better Co-ordination
• Optimal Resource Utilization
• Cost Control
• Rationalization of production Activities.

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 GANTT CHARTS
• A Gantt chart is a horizontal bar chart developed as a production
control tool in 1917 by Henry L. Gantt, an American engineer
and social scientist.

• Frequently used in project management.

• A Gantt chart provides a graphical illustration of a schedule

that helps to plan, coordinate, and track specific tasks in a
project.
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 GANTT CHARTS
• A Gantt chart is a horizontal bar chart that visually represents a
project plan over time.
• Modern Gantt charts typically show you the status of—as well as
who’s responsible for—each task in the project.
• Gantt charts contain the following features:
1. Start and end dates for tasks
2. Project milestones
3. Dependencies between tasks
4. Person assigned to each task
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 GANTT CHARTS

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 INVENTORY
• Inventory is any kind of resource which has economic
value and is maintained to fulfill the present and future
requirements.

• Inventory can be physical, human or financial.

• Inventory is necessary evil – too little can cause disruptions and

too much can cause bankruptcy.

• Maintaining right inventory is strategic for the organization.

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 NATURE AND IMPORTANCE

Inventories are a vital part of business. Not only are they necessary for
operations, but also they contribute to customer satisfaction.
A typical manufacturing firms carries different kinds of inventories,
including the following:
• Raw materials;
• Partially finish goods (work in progress);
• Finish goods;
• Replacement parts;
• Goods in transit to ware house or customers

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 TYPES OF INVENTORY
1. Lot size or Cycle Inventory – Inventory kept to meet the
average demand during replenishment period.

2. Pipeline or Transit Inventory – Inventory kept to meet the

shortfall due to inventory in transit, (work in process)

3. Safety Inventory – To meet the uncertainties of demand.

4. Seasonal Inventory – to meet seasonal demands

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 REASONS FOR CARRYING
INVENTORY
• Improve customer service.
• Reduce certain costs such as
• ordering costs
• stock out costs
• acquisition costs
• quantity costs
• start-up quality costs
• Contribute to the efficient and effective operation of the
production system by decoupling the subsets.

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 INVENTORY CONTROL
The function of directing the movement of goods through the entire
manufacturing cycle from the requisitioning of raw materials to the
inventory of finished goods in an orderly manner to meet the
objectives of maximum customer service with minimum investment
and efficient (low cost) plant operation is termed as inventory
control.

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 INVENTORY CONTROL
• Essentially inventory control is concerned with production planning.
• It determines inventory of a finished product or inventory of
materials used in making such products.
• Inventory Control means maintaining the inventory at a desired level.
The desired-level keeps on fluctuating as per the demand and supply
of goods.
• Inventory control is affected by changes in customer demand,
holding costs, ordering costs and back order costs.

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 USES

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 FUNCTION OF INVENTORY CONTROL
• To meet anticipated customer demand;

• To smooth production requirement;

• To decouple operation

• To protect against stock outs;

• To take advantage of order cycles

• To hedge against price increases

• To permit operations
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 INVENTORY CONTROL CAN BE
ACHIEVED BY
• Purchasing items of the right-quantity, at the right-place and
at right-time.

• Providing a suitable, secure, and sufficient place for storage.

• Developing a proper inventory identification system.

• Maintaining an up-to-date record keeping.

• Making proper requisition procedures.

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 STEPS IN INVENTORY CONTROL

• Deciding the maximum- minimum limits of inventory.

• Determination of Reorder point.

• Determination of reorder quantity.

• Perpetual inventory control.

• ABC analysis.

• Method of control through turn over.

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 MAXIMUM STOCK LEVEL
Quantity of inventory above which should not be allowed to be kept. This
quantity is fixed keeping in view the disadvantages of overstocking.
Factors to be considered
1. Amount of capital available.
2. Storage space available.
3. Possibility of loss.
4. Cost of maintaining stores.
5. Likely fluctuation in prices.
6. Seasonal nature of supply of material.
7. Restriction imposed by Govt.
8. Possibility of change in fashion and habit.
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 MINIMUM STOCK LEVEL
• This represents the quantity below which stocks should not be
allowed to fall .

• The level is fixed for all items of stores.

Factors are taken into account

1. Lead time

2. Rate of consumption of the material during the lead time.

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 SAFETY STOCK
• To meet the uncertainties arising from fluctuating demands,
fluctuating lead times, unforeseen situations etc., an extra stock is
invariably maintained for each item in the inventory.

• The extra stock is termed as buffer stock or safety stock .

• Safety stock arise due to variations in consumption rates and

variations in lead times

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 SAFETY STOCK
The factors influencing the determination of safety stock
• Nature of the item.
• Annual usage .
• Lead time of manufacture.
• Stock out cost.
• Seasonality.
• Risk of obsolesce/deterioration.
• Macro/ environmental issues.
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 RE-ORDERING LEVEL

• It is the point at which if stock of the material in store

approaches, the store keeper should initiate the purchase
requisition for fresh supply of material.

• This level is fixed some where between maximum and minimum

level.

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 RE-ORDER CURVE

The reorder point (ROP) tells when to

order

𝐷𝑒𝑚𝑎𝑛𝑑 Lead time for a

ROP = ∗
𝑝𝑒𝑟 𝑑𝑎𝑦 new order in days
=dxL
D
d=
Number of working days in a year

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 EXAMPLE
Demand = 8,000 DVDs per year
250 working day year
Lead time for orders is 3 working days.
SOLUTION
D
Demand per day,(d) =
Number of working days in a year
8000
d= =32 Units per day.
250
𝐷𝑒𝑚𝑎𝑛𝑑 Lead time for a
Reorder Point (ROP) = ∗ =dxL
𝑝𝑒𝑟 𝑑𝑎𝑦 new order in days
= 32 units per day*3 day=96 Units.

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 ECONOMIC ORDER QUANTITY
(EOQ)
• EOQ concept developed by Ford Harris in 1913.

• Concept is to balance the cost of holding excess costs against that of ordering
costs.

• EOQ models have evolved over the period for overcoming the simplistic
assumptions.

• EOQ is the size of the order that yields the optimum total
incremental inventory cost during the given period of time under the
assumption that demand rate is constant.

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 ECONOMIC ORDER QUANTITY
It is also known as standard order quantity , optimum quantity or
economic lot size.

Ordering materials whenever stock reaches the reorder point

It tells how production to be schedule

Optimum level of inventory involves two types of cost

1. Ordering cost
2. Carrying cost
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 ORDERING COST
• It is the entire cost to acquire the raw material(supplies).

• It include

-Requisitioning

-Order placing

-Transportation

-Receiving, inspecting and storing

-Clerical and staff

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 CARRYING COST
• It is the cost incurred to maintain the given level of inventory

• It include

-Warehousing

-Handling

-Clerical and staff

-Insurance

-Deterioration and obsolescence

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 CARRYING COST
The unit holding/carrying cost, 𝐶𝑐 , is usually expressed in one of two ways:
1. As a fixed cost.
For example, 𝐶𝑐 is Rs 0.50 per unit per year.
2. As a percentage (typically denoted by I) of the item’s unit purchase cost
or price.
For example, 𝐶𝑐 is 20% of the item’s unit cost.
In general, 𝐶𝑐 = I x P
I = Annual Carrying Cost as a Percentage of the Unit Cost of the Item
P = Purchase Cost per Unit of the Inventory Item

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 INVENTORY COST FACTORS

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 ECONOMIC ORDER QUANTITY
Annual
cost (Rs)

Total Cost
Slope = 0

Carrying Cost
Minimum total
cost

Ordering Cost

Optimal order Order Quantity, Q

Qopt= EOQ

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 INVENTORY MODELS

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 INVENTORY MODELS
MODELS WITHOUT SHOTAGES MODELS WITH SHOTAGES

1. Demand rate constant in all cycles, 1. Variable order cycle time, supply is
supply is instantaneous instantaneous

2. Different rates of demand in different 2. Constant order cycle time and

cycles but total demand is known supply is uniform
over the entire planning period
3. Demand rate is uniform but supply
3. Demand rate is constant but supply is is non-instantaneous
non-instantaneous

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 BASIC NOTATIONS
• C= purchase or manufacturing cost per
unit (Rs/unit)
• 𝐶𝑂 = ordering cost or set up cost per order
(Rs/order)
• 𝐶𝐻 OR 𝐶𝐶 = cost of carrying one unit of
item in inventory for a given length of
time (Rs/unit time)
• r=cost of carrying one rupee’s worth of
inventory per time period (usually
expressed in terms of percent of rupee
value of inventory) (percent/time)
• 𝐶𝑆 = shortage cost per unit per time
(Rs/unit-time).
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• D= annual Demand.
• Q= order quantity no of units
ordered per order.
• ROL= reorder level
• LT= replenishment lead time
• n= no of orders per unit time
(orders/time)
• t= reorder cycle time (time interval
between successive orders)
• tp=production period (time period)
• rp= production rate
• TC= total inventory cost,
• TVC = Total variable inventory cost
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 INVENTORY MODELS

1. Purchasing model without shortages

2. Manufacturing model without shortages

3. Purchasing model with shortages

4. Manufacturing model with shortages

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 MODEL 1: PURCHASING MODEL
WITHOUT SHORTAGES
• Objective is to find EOQ - Q*, which minimizes cost
Assumptions are
1. Only one product is involved
2. Demand requirements known and constant rate per time period
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
7. Shortages are not allowed.
8. Each item is independent and no saving possible by
substitution.
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 MODEL 1
PURCHASING MODEL WITHOUT SHORTAGES

IE _PRJ_MVK
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 EOQ DERIVATION
Let

Q=Order quantity no of units ordered per order.

D = Annual demand

C=Unit Cost, Rs/unit

𝐶𝑜 = Ordering cost, Rs/Order

𝐶𝑐 = holding cost or inventory carrying cost /unit/year

TC = Total annual cost of operating the system (Rs/year)

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 EOQ DERIVATION
𝐷
• No of purchase orders to be furnished =
𝑄
𝐷
• Total procurement cost = *𝐶𝑜
𝑄
(𝑄1 +𝑄2 ) (𝑄+0) 𝑄
• Average annual inventory = = =
2 2 2
𝐷 𝑄
• Total cost =( *𝐶𝑜 )+ ( *𝐶𝑐 )+P*D,
𝑄 2

• To minimize total cost differentiating w.r.to Q and equating to zero ,

𝑑(𝑇𝐶) 𝐷∗𝐶𝑜 𝐶𝑐
= 2 + = 0, 𝑸∗ =
𝟐𝑫𝑪𝒐
𝑑𝑄 𝑄 2 𝑪𝒄

• This formula is called Wilson Lot Size Formula

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 EOQ DERIVATION

• The minimum total annual inventory cost is given by

𝑻𝑪𝑴𝒊𝒏 = 𝟐𝑫𝑪𝒐 𝑪𝒄

• Time between orders, 𝑸∗

𝑻∗ =
𝑫

• Optimum number of orders placed per year, ∗ 𝑫

𝒏 =
𝑸∗

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 EXAMPLE
Find the Optimum Quantity for the following EOQ model.
• Annual usage 500 pieces
• Cost per piece Rs. 100
• Ordering cost Rs. 10 per order
• Inventory holding cost 20% of Average Inventory

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 SOLUTION
Given that
Demand (D) = 500 pieces

Set up cost (Co) = 10, I=20%

Purchasing cost (P) =100

Holding cost (Cc) =I*P= 100 X 20% = Rs. 20

∗ 𝟐𝑫𝑪𝒐 𝟐∗𝟓𝟎𝟎∗𝟏𝟎
EOQ=𝑸 = = = 22 pieces (rounded)
𝑪𝒄 𝟐𝟎

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 EXAMPLE-2
A company makes bicycles. It produces 450 bicycles a month. It buys
the tires for bicycles from a supplier at a cost of Rs 20 per tire. The
company’s inventory carrying cost is estimated to be 15% of cost and
the ordering is Rs 50 per order,
a. Calculate the EOQ.
b. What is the number of orders per year?
c. Compute the average annual ordering cost.
d. Compute the average inventory
e. What is the average annual carrying cost?
f. Compute the total cost

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 SOLUTION

D = annual demand = (2 tires per bicycle) x (450 bicycles per month) x

(12 months in a year)= 10,800 tires

Co = ordering cost = Rs 50 per order

Cc= carrying cost = (15%) x (Rs 20 per unit) = Rs3.00 per unit per year.

𝟐𝑫𝑪𝒐 𝟐∗𝟏𝟎𝟖𝟎𝟎∗𝟓𝟎
a. EOQ=𝑸∗ = = = 600 tyres.
𝑪𝒄 𝟑

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 SOLUTION
b. Number of orders per year = D / Q = 10,800 / 600 = 18
orders per year
c. Average annual ordering cost = (18 orders per year) x (Rs 50 per
order) = Rs 900 per year
d. Average inventory = Q / 2 = 600 / 2 = 300 tires.
e. Annual carrying cost = (Average Inventory) x (Cc)= (300 tires) x
( Rs 3) = Rs 900 per year.
f. Total cost = (Average annual ordering cost) + (Average annual
carrying)= (Rs 900) + (Rs 900) = Rs 1,800.

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 EXAMPLE 3
A cast iron bracket has a demand of 9000 units per year. The cost of one
procurement is Rs 100 and the holding cost per unit is Rs 2.40 per year. The
replacement is instantaneous and no shortage are allowed, Determine
a. The economic lot size.
b. The no of orders per year.
c. The time between orders.
d. The company operates for 300 days per year. The procurement time is
10 days and the safety stock is maintained at a level of 100 units. Find
the re order point, the maximum inventory and the average inventory.
e. Minimum total variable yearly cost.
f. The total cost per year, if Rs 3 is the cost of one item.

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 SOLUTION
Demand (D) = 9000 units/year, Co=Rs 100 per procurement, Purchasing cost (P)
= per item Rs 3,Holding cost (Cc) =Rs 2.40 per unit per year

𝟐𝑫𝑪𝒐 𝟐∗𝟏𝟎𝟎∗𝟗𝟎𝟎𝟎
a. EOQ=𝑸∗ = = = 866 per procurement.
𝑪𝒄 𝟐.𝟒

𝟗𝟎𝟎𝟎
b. The no of orders per year = 𝒏∗ = = 𝟏𝟎. 𝟒 𝒐𝒓𝒅𝒆𝒓𝒔/𝒚𝒆𝒂𝒓.
𝟖𝟔𝟔

𝟖𝟔𝟔
c. Time between orders per year = *300 = 29 days
𝟗𝟎𝟎𝟎

d. Re order level = Safety Stock + Consumption during lead time

𝟗𝟎𝟎𝟎
= 100+ ∗ 𝟏𝟎 =400 units
𝟑𝟎𝟎

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 SOLUTION
Maximum Inventory = 𝑸∗ +Safety stock = 866 +100= 966 units.

Minimum Inventory = Safety stock = 100= 100 units.

𝟗𝟔𝟔+𝟏𝟎𝟎
Average inventory = = 533 units.
𝟐

e. Minimum total variable yearly cost = 𝑇𝐶𝑀𝑖𝑛 = 2𝐷𝐶𝑜 𝐶𝑐 =

2 ∗ 9000 ∗ 100 ∗ 2.4 = Rs 2080

f. Total Cost per year = 3*9000+minimum total variable yearly cost

= 27000+2080 =29080 (Rs)

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 MODEL 2: MANUFACTURING MODEL
WITHOUT SHORTAGES
Objective is to find EPQ - Q*, which minimizes cost
Assumptions are
Demand for items from inventory is continuous and at a constant rate
Production runs to replenish inventory are made at regular intervals
During a production run, the production of items is continuous and at a
constant rate
Production set-up/ordering cost is fixed (independent of quantity produced)
The lead time is fixed
The purchase price of the item is constant, i.e. no discount is available
The replenishment is made incrementally.
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 MODEL-2

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 MODEL-2
In this situation, when the order is placed, the supplier begins
producing the units and supplies them continuously. While new units
are added to inventory, other units are being used.

Thus, if delivery rate (P) > demand rate (D), the net result will be a net
increase in the inventory level.

The slope of replenishment line will thus be (P-D). Similarly the slope
of demand line will be (-D).

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 ECONOMIC BATCH QUANTITY
(EBQ)
Let
Q* = Optimal production quantity (or EPQ)
Co = Production Setup cost
Cc = Inventory carrying cost
D = annual demand
d = daily demand rate
p = daily production rate
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 EBQ DERIVATION
𝑑
Maximum inventory,𝐼𝑀𝑎𝑥 =Q x (1- )
𝑝
𝑄 𝑑
Average inventory,𝐼𝑎𝑣𝑔 = (1- )
2 𝑝
𝐷
Total procurement cost = x 𝐶𝑜
𝑄
𝑄 𝑑
Total carrying cost = (1- ) x 𝐶𝑐
2 𝑝

Total cost = Production cost+ Production Setup cost+ Inventory Carrying cost
(Production cost does not depend on Q)
As in the EOQ model, at the optimal quantity Q* we should have:
𝐷 𝑄∗ 𝑑
Setup cost = Carrying cost , *𝐶 = (1- )*𝐶𝑐
𝑄∗ 𝑜 2 𝑝
𝟐𝑫𝐶𝑜 𝒑
On Simplification, Economic Batch Quantity, ∗
EBQ 𝑸 = ( )
𝐶𝑐 𝒑−𝒅
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 EBQ

• The minimum total annual inventory cost is given by

𝒑−𝒅
𝑻𝑽𝑪𝑴𝒊𝒏 = 𝟐𝑫𝑪𝒐 𝑪𝒄 ( )
𝒑
• Optimal length of each lot size production run,𝑡𝑝∗ =𝑸∗
𝒑
• Optimal production cycle time,𝒕 = 𝑸∗
𝑫
• Optimal number of production cycles, ∗ 𝑫
𝑁 =
𝑸∗

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 EXAMPLE-4

A contractor has to supply 10,000 bearings per day to an

automobile manufacturer. He finds that when he starts
production run, he can produce 25,000 bearings per day. The
cost of holding a bearing in stock per year is Rs. 200 and the set
up costs for a production run is Rs 1,800 How frequently should
production run be made?

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 SOLUTION
Co=Rs1800 per production run, Cc= Rs 200 per year, p=25,000 bearings per day,
d= 10,000 bearings per day

D=10,000*300=30,00,000 units per year (assuming 300 working days in the

year)

a. Economic batch quantity ,EBQ

𝟐∗𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎∗1800 𝟐𝟓𝟎𝟎𝟎
𝑸∗ = ( )=9487 bearings
200 𝟐𝟓,𝟎𝟎𝟎−𝟏𝟎,𝟎𝟎𝟎

𝑸∗ 𝟗𝟒𝟖𝟕
b. Frequency of production cycle = = = 𝟎. 𝟗𝟓 𝒅𝒂𝒚𝒔
𝒅 𝟏𝟎,𝟎𝟎𝟎

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 EXAMPLE -5
A product is sold at the rate of 50 pieces per day and is manufactured
at a rate of 250 pieces per day. The set up cost of the machines is Rs.
2000 and the storage cost is found to be Rs. 0.15 per piece per day.
With labour charges of Rs. 3.20 per piece, material cost at Rs 2.10 per
piece and overhead cost of Rs. 4.10 per piece, find the minimum cost
batch size if the interest charges are 8 percent (assume 300 working
days in a year). Compute the optimal number of cycles required in a
year for the manufacturing of this product.
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 SOLUTION

D=50*300=15,000 pieces per year,Co=Rs 2000 per production

run,p=250*300=75000 pieces per
year,Cc=0.15*300+0.08(3.2+2.1+4.1)=Rs 45.752 per year.
a. Economic batch quantity ,EBQ

𝟐∗𝟏𝟓𝟎𝟎𝟎∗2,000 𝟕𝟓𝟎𝟎𝟎
𝑸∗ = ( )=1280 pieces (approx.)
45.752 𝟕𝟓𝟎𝟎𝟎−𝟏𝟓𝟎𝟎𝟎

𝑫 𝟏𝟓𝟎𝟎𝟎
b. Optimal no of cycle = = = 𝟏𝟐 𝒄𝒚𝒄𝒍𝒆𝒔 (𝒂𝒑𝒑𝒓𝒐𝒙. )
𝑸∗ 𝟏𝟐𝟖𝟎

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 EXAMPLE-6
a. At present a company purchases an item X from outside suppliers.
The consumption of this item is 10,000 units per year. The cost of
the item is Rs 5 per unit and the ordering cost is estimated to be Rs
100 per order. The cost of carrying inventory is 25%. if the
consumption rate is uniform , determine the economic purchasing
quantity.
b. In the above problem assume that the company is going to
manufacture the item with the equipment that is estimated to
produce 100 units per day. The cost of the units produced is Rs
3.50 per unit. The Set up cost is Rs 150 per set up and the
inventory carrying charge is 25%.How has your answer
changed?(Assume 250 working days per year)
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 SOLUTION
a. D=10,000 units per year, C= Rs.5,Co=Rs.100 per order ,Cc=25% of
5= Rs 1.25 per year
Economic Order Quantity ,EOQ
𝟐𝑫𝑪𝒐 𝟐∗𝟏𝟎𝟎𝟎𝟎∗𝟏𝟎𝟎
𝑸∗ = = = 1265 units.
𝑪𝒄 𝟏.𝟐𝟓

b. p=100 units per day, Co=Rs.150 per set up, C=Rs 3.5 per unit,
Cc=25% of 3.5=Rs 0.875 per year, d=10000/250=40 units per day.

Economic batch quantity ,EBQ for each production cycle

∗ 𝟐∗𝟏𝟎,𝟎𝟎𝟎∗150 𝟏𝟎𝟎
𝑸 = ( )=2391 units.
0.875 𝟏𝟎𝟎−𝟒𝟎
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 INVENTORY MODELS

INVENTORY MODELS

FIXED ORDER QUANTITY MODEL FIXED PERIOD MODEL

(Q-SYSTEM) (P-SYSTEM)

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 CONTINUOUS REVIEW (Q) SYSTEM

• A continuous review (Q) system or Reorder point (ROP)

system or Fixed Order-quantity system tracks the remaining
inventory of an item each time a withdrawal is made to
determine whether it is time to reorder.
• In practice, these reviews are done frequently (e.g. daily) and
often continuously (after each withdrawal).
• At each review a decision is made about an item’s inventory
position.
• If it is considered to be too low, the system triggers a new order.

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 Q-SYSTEM
• The order quantity (Q) is fixed.

• Ordering time varies according to the fluctuations in demand.

• Whenever the stock level touches the reorder level, an order is placed for a fixed
quantity (Q) equal to EOQ.

• Order quantity is decided in such a way so as to minimize the total cost of

procurement (production), storage, handling, distribution and other charges of
inventory.

• Reorder level is sum of demand during lead time and safety stock.

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 Q-SYSTEM

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 PERIODIC REVIEW (P) - SYSTEM

• An alternative inventory control system is the Periodic review

system (P) or fixed interval reorder system or periodic
reorder system.
• In the periodic review system (P) an item’s inventory position is
reviewed periodically rather than continuously.
• Such a system can simplify delivery scheduling, because it
establishes a routine.
• A new order is always placed at the end of each review and the
time between orders (TBO) is fixed at P.

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 P-SYSTEM
• Period of review is fixed.

• Quantity ordered change as per demand or rate of consumption.

• The period of review (P) is decided such that the order quantity is
economical to purchase the items.

• It reduces the time a manager spends analyzing inventory counts,

which allows more time for other aspects of the business.

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 P-SYSTEM

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 INVENTORY MODELS-COMPARISON
SL NO Q-SYSTEM P-SYSTEM
1 The order quantity is fixed and usually The time interval between two consecutive
equal to EOQ-Economic Order orders is fixed and the order quantity
Quantity depends on stock in hand and demand

2 Its suitable for products of low values Its suitable for products of higher values
and bulk volume (Eg: bolts and nuts) and low volume (Eg: bearing and costly
items)

3 Order is placed at ROL Order is placed at regular intervals

4 Preferred when suppliers insist on Preferred when suppliers deliver at regular

minimum bulk purchase intervals and fixed intervals.

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 SELECTIVE INVENTORY CONTROL
TECHNIQUE
• The selective inventory control techniques means the variation of
inventory control from item to item based on following factors
• Based on cost of product.
• Based on lead time.
• Based on consumption rate.
• Based on different items in procurement, criticality and
frequency of usage.

121
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 SELECTIVE INVENTORY CONTROL
TECHNIQUE
• Some Selective Inventory Control Techniques are
• ABC Analysis
• GOLF Analysis
• SOS Analysis
• HML Analysis
• SDE Analysis
• FSND Analysis
122
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 SELECTIVE INVENTORY CONTROL
TECHNIQUE
NO CLASSIFICATION CRITERIA

1 ABC Analysis Based on annual usage value of items.

2 H.M.L Analysis (High-Medium-Low) Based on unit cost of material.
3 V.E.D Analysis (Vital-Essential-Desirable) Based on criticality of the item

4 S.D.E Analysis (Scare-Difficult-Easy) Based on difficulties in procurement

5 F.S.N Analysis (Fast-Slow-Non moving) Based on movement of items from stores.

6 G.O.L.F (Government-Ordinary-Local-Foregin) Based on source of materials.

7 S.O.S (Seasonal-Off-Seasonal) Based on seasonality of items.

8 XYZ Analysis Based on inventory value of items.

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 ABC ANALYSIS
• Classifying inventory according to annual value of consumption of the
items.
• A - very important
• B - moderately important
• C - least important
• It is based on the principles of ‘vital few and trivial many’.
• A-items : 15% of the items are of the highest value and their inventory accounts
for 70% of the total.
• B-items : 20% of the items are of the intermediate value and their inventory
accounts for 20% of the total.
• C-items : 65%(remaining) of the items are lowest value and their inventory
accounts for the relatively small balance, i.e.10%

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15-01-2019 125
 ABC ANALYSIS
Policies for A
• Develop class “A” suppliers more.
• Purchasing dept. makes maximum efforts to expedited and delivery of these
items
• The stock is maintained say in at least once in 15 days
• Policies for B
• Order quantities, re-order stocks and safety stocks should be fixed and
revised for B items say once in 4-6 months
• Should be ordered less frequently in comparison to A items
• Policies for C
• Large quantities can be bought as the cost involved will be least.
• Paper work is reduced if the stock is maintained and ordered once or twice in
a year.
• The source of their supply can be based on their reliability

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 EXAMPLE
Following components are required for repairing oil engines.
Classify the same using ABC analysis

Component Code C01 C02 C03 C04 C05 C06 C07 C08 C09 C10

Units cost in Rs 100 200 50 300 500 3000 1000 7000 5000 60
Annual Consumption in
100 300 700 400 1000 30 100 500 105 1000
units

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 SOLUTION
Total spending per year
Annual
Component Total Cost Usage as %
Units cost in Rs Consumption in
Code per year total usage
units
C01 100 100 10000 0.2
C02 200 300 60000 1.2
C03 50 700 35000 0.7
C04 300 400 120000 2.4
C05 500 1000 500000 10
C06 3000 30 90000 1.8
C07 1000 100 100000 2
C08 7000 500 3500000 70
C09 5000 105 525000 10.5
C10 60 1000 60000 1.2
Total Usage 5000000 100

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 SOLUTION
Percentage Percentage of
Sl No Category Component Code Action
of Items Usages

C01,C02,C03,C04,
1 Class A 10% 80% Close Control
C05,C06,C07,C10

2 Class B C09 20% 10% Regular View

3 Class C C08 70% 10% Infrequent View

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 SOS ANALYSIS
• SOS analysis is based on seasonality of items and it classifies all the items
into two categories ‘Seasonal ‘And ‘Off seasonal ‘

• The analysis helps in:

• Identifying items that are available only during a limited period of the year .
For e.g. Raw mangoes are only available only during a summers

• Identifying items that are seasonal but available throughout the year
however their costs in offseason are relatively high.

• SOS analysis can be selected when we want to determine the seasonality of

items and the right season for procuring them.
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 SDE ANALYSIS
• This analysis is based on spares availability of an item
• S - refers to Scarce Items, especially imported and those which are very
much in short supply.
• D - are Difficult items which are procurable in market but not easily
available.
• For example, items which have to come from far off cities or where
there is not much competition in market or where good quality supplies
are difficult to get or to be procured.
• E - refers to Easy items – Items are those which are easily available;
mostly local items.
• It is normally advantageous to consider A, V & S items for selective control

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 FSN ANALYSIS
• This analysis is to help control obsolescence and is based on the
consumption pattern of the items.
• The items are analyzed to be classified as Fast-moving (F), Slow-
moving (S)and Non-moving (N) items.
• The Non-moving items (usually not consumed over a period of two
years) are of great importance.
• Scrutiny of non-moving items is to be made to determine whether
they could be used or be disposed off.
• The fast and slow-moving classifications help in arrangement of stock
in stores and their distribution and handling methods.

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 HML ANALYSIS
• The cost per item (per piece) is considered for this analysis.
• High cost items (H), Medium Cost items (M) and Low Cost item (L) help in
bringing controls over consumption at the departmental level.
• Uses and application
To assess storage & Security •High priced items in cupboards e.g.
Requirements bearings, worm wheels
To keep control over consumption at the •Authority to indents of High & Medium
departmental head level priced items to departmental head after
careful scrutiny
To determine the frequency of stock checking frequency: more for high priced
verification items and less for L category
To evolve buying policies to control Excess supply: Not accepted in case of H
purchases & M category, Acceptable in case of L
category
To delegate authorities to different buyers H & M by senior & L by junior buyers
to make petty cash purchase
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 MATERIAL REQUIREMENTS
PLANNING (MRP)
• MRP refers to the calculation of the quantity and timing of
materials, parts, and components needed to create an end item.

• Manufacturing computer information system.

• Determines quantity & timing of dependent demand items

• The theme of MRP is “getting the right material at the

right place at right time in right quantity”.

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 MRP - BENEFITS
• Increased customer satisfaction due to meeting delivery
schedules.

• Faster response to market changes.

• Improved labor & equipment utilization.

• Better inventory planning & scheduling.

• Reduced inventory levels without reduced customer service.

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 MRP & THE PRODUCTION PLANNING
PROCESS

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 MRP SYSTEM

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 MRP SYSTEM INPUT & OUTPUT

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 WORKING OF MRP SYSTEM
The MRP programme operates on the inventory, master plan and the Bill of
Materials data.
It works in this way :
1. A list of end items needed day-wise is specified by the Master Plan.
2. A description of the materials and parts needed to make each item
is specified in BOM.
3. The number of units of each item and material currently on hand is
contained in the inventory records.
4. The MRP program computes the quantities of each item required.
The number of units of each item required is then corrected for on-
hand amounts, and the net requirement is ‘off-set’ or set back in
time to allow for the lead time needed to obtain the material.
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 REPORTS GENERATED FROM A
MRP SYSTEM
Primary Reports:
• Primary reports are the main or the normal reports used for
inventory and production control.
These reports consist of:
1. Planned Orders to be released at a future time.
2. Order Release Notices to execute the planned orders.
3. Changes in Due Dates of open orders due to rescheduling.
4. Cancellations or Suspension of open orders due to
cancellation or reduction of items on the Master Production
Plan.
5. Inventory Status Data.
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 REPORTS GENERATED FROM A
MRP SYSTEM
Secondary Reports:
• These are additional reports which are optional under the MRP system.
These reports consist of:
1. Planning Reports to be used, for example, in forecasting inventory
and specifying requirements over some future time horizon.
2. Performance Reports for purposes of pointing out inactive items and
determining the agreement between actual and programmed item
lead times and between actual and programmed quantity usages and
costs.
3. Exception Reports that point out serious discrepancies, such as
errors, out-of-range situations, late or overdue orders, excessive scrap
or non-existent parts.
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 BILL OF MATERIAL (BoM)
• A bill of materials (BoM) is a list of the parts or components that
are required to build a product.
• The BoM provides the manufacturer's part number (MPN) and
the quantity needed for each component.
• BOM is a multi-level document that provides build data for
multiple sub-assemblies (products within products) and includes
for each item.
• It may also include attached reference files, such as part
specifications, CAD files and part drawings.

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 BILL OF MATERIALS

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