Inventory and control management Part -A

Q1. What kind of role does forecasting play in inventory control decision-making?

Ans Inventory management is a science primarily about specifying the shape and percentage of
stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials. The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods, and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It also involves systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status and handle all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. It also may includeABC analysis, lot tracking, cycle counting support, etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs. Forecasting is the estimation of the value of a variable (or set of variables) at

some future point in time. In this note we will consider some methods for forecasting. A forecasting exercise is usually carried out in order to provide an aid to decision-making and in planning the future. Typically all such exercises work on the premise that if we can predict what the future will be like we can modify our behaviour now to be in a better position, than we otherwise would have been, when the future arrives. Applications for forecasting include:

inventory control/production planning - forecasting the demand for a product enables us to control the stock of raw materials and finished goods, plan the production schedule, etc investment policy - forecasting financial information such as interest rates, exchange rates, share prices, the price of gold, etc. This is an area in which no one has yet developed a reliable (consistently accurate) forecasting technique (or at least if they have they haven't told anybody!) economic policy - forecasting economic information such as the growth in the economy, unemployment, the inflation rate, etc is vital both to government and business in planning for the future.

Think for a moment, suppose the good fairy appeared before you and told you that because of your kindness, virtue and chastity (well - it is a fairy tale) they had decided to grant you three forecasts. Which three things in your personal/business life would you most like to forecast? Personally I would choose (in decreasing order of importance):

the date of my death the winning numbers on the next UK national lottery the winning numbers on the UK national lottery after that one

As you can see from my list some forecasts have life or death consequences. Also it is clear that to make certain forecasts, e.g. the date of my death, we could (in the absence of the good fairy to help us) collect some data to enable a more informed, and hence hopefully more accurate, forecast to be made. For example we might look at life expectancy for middle-aged UK male academics (non-smoker, drinker, never exercises). We might also conduct medical tests. The point to emphasise here is that collecting relevant data may lead to a better forecast. Of course it may not, I could have been run over by a car the day after this written and hence be dead already. Indeed on a personal note I think (nay forecast) that companies offering Web (digital) immortality will be a big business growth area in the early part of the 21st century.

Q2. What are the selective inventory management techniques used by a firm? Explain the basis of the ABC classification.

Ans The ABC analysis is a business term used to define an inventory categorization technique often used in material management. It is also known as "Selective Inventory Control." Policies based on ABC analysis:

A ITEMS: very tight control and accurate records B ITEMS: less tightly controlled and good records C ITEMS: simplest controls possible and minimal records The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance. A items are very important for an organization. Because of the high value of these A items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g., "Just- in- time") to avoid excess capacity. B items are important, but of course less important, than A items and more important than C items. Therefore, B items are intergroup items. C items are marginally important. The following is an example of the Application of Weighed Operation based on ABC class in the electronics manufacturing company with 4,051 active parts. Figure 1

Using this distribution of ABC class and change total number of the parts to 4,000. Figure 2 Uniform Purchase: When you apply equal purchasing policy to all 4,000 components, example weekly delivery and re-order point (safety stock) of two-week supply assuming that there are no lot size constraints, the factory will have a 16,000 delivery in four weeks and the average inventory will be 2.5 weeks supply. Weighed Purchase: In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly (every four weeks) delivery with re-order point of three-week supply, B class Bi-weekly delivery with re-order point of twoweek supply, A class weekly delivery with re-order point of one-week supply, total number of delivery in four weeks will be (A 200x4=800)+(B 400 x2=800) + (C 3400x1=3400)=5000 and average inventory will be (A 75%x1.5weeks)+(B 15%x3weeks)+ (C 10%x3.5weeks)= 1.925 week supply. By applying weighed control based on ABC classification, required man hours and inventory level are drastically reduced.

ABC analysis categories

There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for [3] a large proportion of the overall value but a small percentage of number of items. Example of ABC class are A items 20% of the items accounts for 70% of the annual consumption value of the items. B items - 30% of the items accounts for 25% of the annual consumption value of the items. C items - 50% of the items accounts for 5% of the annual consumption value of the items.
[4]

Another recommended breakdown of ABC classes:

1. "A" approximately 10% of items or 66.6% of value 2. "B" approximately 20% of items or 23.3% of value 3. "C" approximately 70% of items or 10.1% of value

Q3. What is non-productive finished goods inventory? How can one reduce the non-productive component of finished goods inventory?

Ans a.) Base stock - that portion of inventory that is replenished after it is sold to

customers. b.) Safety stock - the second portion of inventory that is held to protect against the impact of uncertainty. Most businesses hold inventory for many reasons. Among them are:

Meeting unexpected demands The chain of supply and demand really comes into consideration here. Business people know that consumers expect goods and services when they need them. Thus, businesses usually stock up their inventories to meet these

unexpected demands. These demands may result in overcrowding of inventories because we never know when the storm strikes and consumers would flock to buy the items.

Smoothing seasonal demands With the comings and goings of major events and the changing seasons, most businesses have inventories at hand to smoothen the seasonal demands. For example, Christmas is just round the corner. With the coming season, retail outlets as well as other businesses are busy meeting and stabilizing the upcoming Christmas demands of consumers. If they do not have any inventory, how can they meet these demands

Taking advantage of price discounts When a business purchase goods from the manufacturers and suppliers, they usually get price discounts if they buy in bigger bulks. Manufacturers and suppliers give these discounts to attract and maintain regular buyers. Taking advantage of price discounts is helpful at times but one must always remember not to overstock the inventory because inefficient buying may cause failure of the business.

Hedging against price increase Businesses usually hold inventory to avoid from the ever fluctuating market price of inventories. Thus, by having efficient and good inventory system, businesses can control their inventory cost.

Getting quality discounts When businesses have inventory in store, they can get quality discounts because they know which goods and services to buy from the suppliers and manufacturers. It helps to learn where to get better deals than no deal at all.

Q4. Differentiate between: a. make-to-order & make-to-stock operations b. pull & push processes

Ans make -to-order & make-to-stock operations :- The difference between MTO and MTS is
MTO--> Make to Order Production is the process where the production order is triggered from a Sales Order. Ex: The Prod process will start only after receiving the sales order from the customer. In this case the product could be customer specific only (Variant) MTS--> Make to Stock MTS scenario can be accomplished by the following settings Need to use strategy group 20 in material master MRP view-Stretgy group 20 is assigned to strategy 20 Strategy 20 is assigned to Requirement type KE (Individual customer requirement) Requirement type KE is assigned to requirement class 040 (Indiv.cust.w/o cons.) Requirement class has all the parameters where we can define Prodcution order type that will be used to create the prod order. The above link needs to be established. Also the MTS can be achieved using Sales Order schedule line catagory which will be assigned to Requirement type/class. Item category is assigned to Reqtype/class and the Item category is maintained in the material master. You can use any of the baove config settings. For MTO --> you just need to have all PP cycle settings in place nothing special needed as it is a plain PP cycle. 1. Make-to-order production is a process in which a product is individually manufactured for a particular customer. In contrast to mass production for an unspecified market where a material is manufactured many times, in make-to-order production a material is created only once though the same or a similar production process might be repeated at a later time. 2. You can use make-to-order production in two scenarios (a) For branches of industry or products where a small quantity of products with a large number of different characteristics are manufactured (Variant Configuration). (b) When a product has to be assembled particularly for a sales order (Individual Customer Requirement). 3. Stock keeping is not usually carried out for products that are made to order. In companies using make-to-order production, the demand program only determines the production area, in which various variant types are produced. Depending on how you track the costs associated with make-to-order production, there are two ways to process maketo-order items during sales order processing. (a) Make to order using sales order (b) Make to order using project system (not relevant for SD application) 4. For make to order production using the sales order, all costs and revenues involved for an order item are held collectively at that item. A particular rule is used that can be changed manually to transfer costs to profitability analysis. 5. Make to order production is largely a production planning configuration. It is also controlled by the requirements type, which is determined by three things the strategy group (MRP 3) in MMR the MRP group (MRP1) in MMR the item category and MRP type (MRP 1) 6. Make-to-order production is controlled by the requirements type. The requirements type is determined on the basis of the MRP group (MRP1) and the strategy group (MRP3) in the material master record. In addition, a plant must be assigned for make-to-order items in the sales order.

b)pull & push processes:- The business terms push and pull originated in logistic and supply chain
management, but are also widely used inmarketing. Wal-Mart is an example of a company that uses the push vs. pull strategy. A pushpull system in business describes the movement of a product or information between two subjects. On markets the consumers usually"pull" the goods or information they demand for their needs, while the offerers or suppliers "pushes" them toward the consumers. In logistic chains or supply chains the stages are operating normally both in push- and [5] pull-manner. Push production is based on forecast demand and pull production is based on actual
[2] [3][4]

or consumed demand. The interface between these stages is called the pushpull boundary or decoupling point.

Push strategy
Another meaning of the push strategy in marketing can be found in the communication between seller and buyer. Depending on the medium used, the communication can be either interactive or noninteractive. For example, if the seller makes his promotion by television or radio, it's not possible for the buyer to interact. On the other hand, if the communication is made by phone or internet, the buyer has possibilities to interact with the seller. In the first case information is just "pushed" toward the buyer, while in the second case it is possible for the buyer to demand the needed information according to their requirements. Applied to that portion of the supply chain where demand uncertainty is relatively small Production and distribution decisions are based on long term forecasts Based on past orders received from retailer's warehouse (may lead to Bullwhip effect) Inability to meet changing demand patterns Large and variable production batches Unacceptable service levels Excessive inventories due to the need for large safety stocks Less expenditure on advertising than pull strategy

Pull strategy
In a marketing "pull" system, the consumer requests the product and "pulls" it through the delivery channel. An example of this is the car manufacturing company Ford Australia. Ford Australia only produces cars when they have been ordered by the customers. Applied to that portion of the supply chain where demand uncertainty is high Production and distribution are demand driven No inventory, response to specific orders Point of sale (POS) data comes in handy when shared with supply chain partners Decrease in lead time Difficult to implement

Q5. What is the difference between variety reduction and standardization? Explain two methods of variety reduction that are commonly used in manufacturing industries. Ans Standards limit a product to a certain range or number of characteristics such as size or quality
levels. The fourth function of standards is the traditional one of reducing variety to attain economies of scale. The majority of standards perform this function. However, variety reduction is no longer simply a matter of selecting certain physical dimensions of a product for standardization (such as the width between threads of a screw). Variety reduction is now commonly applied to nonphysical attributes such as data formats and combined physical and functional attributes such as computer architectures and peripheral interfaces.

The process of setting variety reduction standards also varies significantly. Many standards of this type are viewed as infrastructure and thus adopted by an industry consensus process. However, standardization of some attribute or element of a product is just as often achieved through the marketplace by one firm gaining control of the underlying technology and using this control to force other manufacturers with whom that firm competes to adopt its version of the technology. Theproduct element then becomes a de facto (non-consensus) standard.6Conceptually, the variety reduction function is the most difficult category of standardization to analyze because of its ability to either enhance or inhibit innovation. Variety reduction typically enables economies of scale to be achieved, but larger production volumes tend to promote morecapitalintensive process technologies. This common evolutionary pattern of a technology over anumber of product life cycles usually reduces the number of suppliers and increases their averagesize. Such trends may or may not reduce competition, but often progressively exclude small,potentially innovative firms from entry due to increased minimum efficient scale thresholds. Standardization supports the

fundamental precepts of build-to-order and mass customization: All parts must be available at all points of use, not just "somewhere in the plant," which eliminates the setup to find, load, or kit parts. As a stand-alone program, standardization can reduce cost and improve flexibility.1 Standardization makes it easier for parts to be pulled into assembly (instead of ordering and waiting) by reducing the number of part types to the point where the remaining few standard parts can receive the focus to arrange demand-pull just-in-time deliveries. Fewer types of parts ordered in larger quantities reduces part cost and material overhead cost. The following practical standardization techniques are presented in all of Dr. Anderson's in-house seminars. Dr. Anderson is an experienced workshop facilitator who can help companies quickly implement standardization.

Part B
Q1. What do you understand by the term Bills of Materials? What is its function and how is it used in planning inventory levels?

Ans A comprehensive list of raw materials, components and assemblies required to build
or manufacture a product. A bill of materials (BOM) is usually in a hierarchical format, with the topmost level showing the end product, and the bottom level displaying individual components and materials. A bill of materials (sometimes bill of material or BOM) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end product. A BOM may be used for communication between manufacturing partners, or confined to a single manufacturing plant.

A BOM can define products as they are designed (engineering bill of materials), as they are ordered (sales bill of materials), as they are built (manufacturing bill of materials), or as they are maintained (service bill of materials). The different types of BOMs depend on the business need and use for which they are intended. In process industries, the BOM is also known as the formula, recipe, or ingredients list. In electronics, the BOM represents the list of components used on the printed wiring board or printed circuit board. Once the design of the circuit is completed, the BOM list is passed on to the PCB layout engineer as well as component engineer who will procure the components required for the design. he basic functions of an MRP system include: inventory control, bill of material processing, and elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing and delivering activities. "Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required." Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below: If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time. If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash while it remains as stock and may never even be used at all. Beginning production of an order at the wrong time can cause customer deadlines to be missed.

MRP is a tool to deal with these problems. It provides answers for several questions: What items are required? How many are required? When are they required?

MRP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced internally, that are components of more complex items. The data that must be considered include: The end item (or items) being created. This is sometimes called Independent Demand, or Level "0" on BOM (Bill of materials). How much is required at a time. When the quantities are required to meet demand. Shelf life of stored materials. Inventory status records. Records of net materials available for use already in stock (on hand) and materials on order from suppliers. Bills of materials. Details of the materials, components and sub-assemblies required to make each product. Planning Data. This includes all the restraints and directions to produce the end items. This includes such items as: Routing, Labor and Machine Standards, Quality and Testing Standards,

Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.

Q2. Why do organizations use collaborative forecasting? What steps are required to make collaborative forecasting successful?

Ans Collaboration between companiesjoint initiatives that go beyond their normal course of day-to-day business, with the aim of delivering significant improvement over the long termis particularly attractive for the consumer packaged goods (CPG) sector. With pricing under pressure from recession-scarred consumers, the temptation for retailers is to transfer the pain upstream to their suppliers by passing on price reductions and forcing them to bear an increasing share of costs. On the supply side, however, there is less and less room for manufacturers to absorb additional costs as volatile input prices put the squeeze on margins and the marketing investment required to differentiate branded products from private-label competitors continues to rise. In our work helping retailers and CPG manufacturers manage their
collaboration efforts, we have seen a handful of basic factors that make collaboration problematic. Some of these factors will be familiar to any organization that's involved in a large-scale change process. Companies may, for example, lack the commitment they need from senior management to drive the collaborations, or the message that the collaboration is important may be "lost in translation" as it passes down through the organization, with the result that middle managers or front-line teams don't show the same enthusiasm and commitment as their leadership does. Sometimes companies fail to provide collaboration efforts with sufficient resources to make them work, or they spread limited resources too thinly over too many initiatives.

These issues are difficult enough to overcome, but they are compounded by the fact that collaboration initiatives must align two separate organizations. To make the collaborations work, the players involved must navigate differences in organizational design and culture. At the same time, a history of difficult relationships can make partners reluctant to share important information, leading them to work on their parts of the "collaboration" in separate silosa recipe for suboptimal solutions.

Finally, the incentives of the different parties involved in the collaboration may be fundamentally misaligned, making it difficult even for enthusiastic, committed staff to make the collaboration work while still fulfilling their other targets. These misaligned incentives arise because different players in the supply chain may see the world in very different ways. A manufacturer, for instance, might want to grow its market share by improving its own offerings relative to competitors, whereas a retailer might be interested in increasing sales or margins across the category, not in changes to product mix.

This difference in outlook can mean that retailers and manufacturers want very different things from the collaboration. Growth-focused manufacturers may be enthusiastic about new promotional opportunities, while retailers operating on thin profit margins may be much more interested in taking cost out of product handling and storage. The relationship and power dynamics between collaborating partners can be dramatically different, too. Manufacturers typically will have relationships with a small number of key retailers, while those same retail partners will have relationships with hundreds of different suppliers.

The following case of a major food manufacturer and a retail chain provides an instructive example of how collaboration can go wrong when participants don't trust each other enough. The two companies agreed to collaborate on a co-branded product line. The retailer hoped that the manufacturer's brand name would boost both the credibility and the sales of its product, while the manufacturer saw the partnership as a way of increasing its own market share within the retailer's network.

The collaborative effort failed to play to either company's strengths, however. The retailer's rich point-of-sale and consumer-preferences data provided the information needed to develop an accurate profile of its customers' requirements, but concerns about sharing that information led the retailer to analyze the data and develop the product specification itself without the benefit of the manufacturer's category expertise. The resulting product was expensive to make and missed the mark on package size, product specifications, and shelf appeal. Sales were disappointing, and within months the partners were forced to reassess their relationship.

Making the right choices

Consumer packaged goods companies can greatly improve their prospects for collaboration by taking a more thoughtful approach to the areas they select for collaboration, their choice of partners, and the way they implement their collaboration efforts. Based on our experience, we have identified six essential steps (summarized in Figure 1) that can make the difference between a productive collaboration and a frustrating one.

1. Collaborate in areas where you have a solid footing. Companies are often tempted to use collaboration as a way to fill gaps in their own capabilities. In practice, the most successful collaborations build on strengths rather than compensating for weaknesses. A manufacturer seeking to collaborate with a major retailer in order to improve its own forecasting performance, for example, will have little to gain from access to the retailer's point-of-sale data unless it has the in-house analytical capability to make effective use of that data. Similarly, there is little point in entering collaborations to boost sales if any increase in demand is likely to run into manufacturing-capacity constraints.

Potential collaborators should also be sure they have the right supporting infrastructure in place in advance of any collaborative effort. Is top management committed to the collaboration process and ready to offer support over the long term? Are in-house information technology (IT) systems robust enough to facilitate real-time data sharing if required?

2. Turn win-lose situations into win-win opportunities with the right benefit-sharing model. Some collaborations promise equal benefits for both parties. If, for example, a manufacturer and a retailer collaborate to optimize product mix, both could expect to benefit from the resulting increase in sales. In other cases, however, the collaboration might create as much value overall but the benefit could fall more to one partner than to the other. Here's one real-life example: a retailer and a manufacturer were able to reduce overall

logistics costs between factory and store by cutting out the manufacturer's distribution centers and treating the retailer's distribution network as one integrated supply chain, from manufacturing plant to store shelf. However, the retailer's supply chain executives struggled to gain acceptance for the idea from their leadership because it resulted in the retailer carrying a far larger fraction of the logistics cost.

Rather than shying away from such asymmetric collaborations, smart companies can make them work by agreeing on more sophisticated benefit-sharing models. These can come in the form of discounts or price increases to more fairly share increased margins or cost reductions, or they can involve compensation in other parts of the relationship. For example, when one retailer collaborated with a manufacturer on a co-branded product line, the manufacturer agreed to absorb the upfront product-development costs in return for an expanded share of the retailer's product offerings across a wider set of categories.

Benefit sharing can help to overcome differences in strategic priorities, too. One growth-focused manufacturer was persuaded to join a supply chain waste-reduction collaboration with a retailer by establishing an agreement to deposit part of the savings both companies achieved into a joint pool, which would then be invested in efforts to generate additional sales.

Similarly, in the product-flow improvement case described in the sidebar ("Opportunities for collaboration," below), the manufacturer provided the upfront investment in new retail-ready packaging, while its retail partner reaped most of the benefits in terms of increased availability and reduced labor costs. The two companies established a joint benefits pool and agreed to use a percentage of the savings to fund future cost-reduction efforts and a sales-improvement program.

3. Select partners based on capability, strategic goals, and value potential. The biggest potential partner might not be the best one. Many companies aim to collaborate with their largest suppliers or customers because they assume that the greatest value is to be found there. In many cases, however, this turns out not to be true. Collaboration may be of more interest to a smaller partner, which might invest more time and effort in the program than a very large one that is already juggling dozens of similar initiatives.

A better approach is one that assesses current customers or suppliers across three key dimensions. First, is there enough potential value in collaborating with this partner to merit the effort? Both partners in a prospective collaboration need to be sure that it will deliver a sufficient return to justify the upfront investment. Second, do both partners have sufficiently common strategic interests to support the collaboration? A retailer that has prioritized growth in a particular region or segment will have more to gain from collaborating with a manufacturer that has a strong offering in the same area. Third, does the partner have the right infrastructure and processes in place to provide a basis for the collaboration? Collaborating to improve forecasting and demand

planning is likely to be frustrating if one partner's existing planning processes, systems, or performance are inadequate.

4. Invest in the right infrastructure and people. Both manufacturers and retailers that participated in our research cited a lack of dedicated resources as one of the top three reasons for the failure of collaboration efforts. Companies frequently underestimate the resources required to make collaborations work, assuming that they can leave it up to staff in various functions to do what's required in addition to their other responsibilities.

In practice, even relatively simple collaborative tasks will be more difficult than equivalent activities conducted within the walls of the organization. That's because staff must overcome differences in culture, organization, and terminology, not to mention the basic challenge of finding the right contact within the partner organization with whom to liaise.

Disconnects within one organization can create problems, too. A "grassroots" collaboration started between two supply chain managers can lead to rapid performance improvements, only to be snuffed out when those higher in the organization fail to understand the initiative's potential. Alternatively, a collaboration agreement made between two board-level executives will fizzle out if the managers responsible for executing it think it is yet another short-lived senior management whim; if they can't see how the collaboration will help them achieve their own objectives; or if they lack the incentive to put additional effort into the project on top of their existing day-today roles.

To prevent both of these problems, best-practice companies devote extra resources to their collaborations, particularly in the early stages of a new relationship. Appropriate infrastructure for a successful collaboration begins at the top of the organization, with a steering committee of senior leaders who can set the defining vision for the collaborative effort and allocate resources to support it. The detailed design of the collaboration program is then completed by a team comprising members of all relevant functions from both partners in the collaboration. The team for a demand-planning effort, for example, should include members from sales, finance, and supply chain for the manufacturer, and from purchasing, merchandising, and store operations for the retailer. This team will also be responsible for the day-to-day monitoring of the effort once it is up and running.

Execution of the collaboration should take place within the line organization and will ultimately form part of the everyday responsibility of the staff assigned to it. The best companies avoid forcing their front-line staff to "reinvent the wheel" by providing strong support when establishing each new collaboration. They may, for example, leverage experience gained in previous collaborations by setting up teams to support their colleagues during the initial phase of subsequent efforts.

5. Establish a robust, joint performance-management system. An effective performance-management system helps a company to ensure that any long-term project is on track and delivering the results it should. In supply chain collaboration efforts, both participants should use the same performance-management system. By building common metrics and targetsand jointly monitoring progress companies avoid the misaligned incentives that damage so many collaboration efforts.

Picking the right metrics can be challenging, however, and it will inevitably involve trade-offs. In a collaboration to reduce logistics costs, for example, the partners may have to choose between a pallet configuration that's optimized to suit a retailer's restocking processes, which will reduce in-store labor costs, and one that optimizes truck fill, which will reduce transportation costs from distribution center to retail store.

How to overcome these potential conflicts? The trick is to keep things simple by picking the smallest possible number of metrics required to give a picture of the collaboration's overall performance, and then to manage those metrics closely, with regular joint reviews and problem-solving sessions to address trade-offs. The real power of any performance-management system comes from this frequent, robust dialogue between partners, yet this is also the element most commonly ignored or underemphasized by collaborating companies.

6. Collaborate for the long term. The final vital ingredient of a successful collaboration is stamina. It may take time and effort to overcome the initial hurdles and make a new collaboration work. Both parties need to recognize this and build an appropriately long-term perspective into their goals and expectations for the collaboration. This means including metrics that review performance beyond the first year, as well as conducting some joint, long-term planning so both partners can gain an understanding of each other's longer-term objectives and identify a roadmap of initiatives they can work on together over time. Such planning helps companies to break out of the short-term-project mentality that can limit the beneficial impact of collaborative efforts. Nevertheless, partners must also take care to ensure that they are doing everything they can to capture any available quick wins, so the collaboration starts delivering value as rapidly as possible.

When companies take a long-term perspective, their collaborative efforts can become a virtuous circle: a greater understanding of each other's capabilities, knowledge, and costs will often reveal new potential sources of value, while the experience of working closely together means that later initiatives will take less time and be easier to execute than early ones.

Q3. Name the important factors that influence the choice of strategyin aggregate planning. Are these o ptions also applicable to service organizations? What special difficulties do services pose for aggre gate planning?

Ans Planning is a primary management responsibility. Aggregate planning is concerned with organizing the quantity and timing of production over a medium period of time up to eight to ten months with undetermined demand. Specifically aggregate planning means combining all of an organization`s resources into one aggregate production schedule for a predetermined intermediate time period. The objective of aggregate planning is to maximize resources while minimizing cost over the planning period. The aggregate production plan is midway between short-range planning and long-range planning. Aggregate planning includes the following factors: 1. Work force size and composition 2. Demand forecasts and orders 3. Raw material planning 4. Plant capacity management 5. Utilizing outside subcontractors 6. Inventory management Aggregate planning is the link between short-term scheduling and long-term capacity planning. What are aggregate planning strategies? There are three types of aggregate planning strategies: Pure Strategy. In this strategy, only one production or supply factor is changed. Mixed Strategy. This strategy simultaneously alters two or more production or supply factors or some combination. Level Scheduling. This strategy has been adopted by the Japanese and it embodies maintaining constant monthly production schedules. What aggregate planning strategies influence demand? Aggregate planning can influence demand in the following ways: 1. Pricing strategies. Pricing can be used to increase or reduce demand. All things being equal, increasing prices reduces demand while lowering prices will increase demand. 2. Advertising and promotion strategies. Advertising and promotion are pure demand management strategies in that they can increase demand by making a product or service better known as well as positioning it for a particular market segment. 3. Delayed deliveries or reserving orders. Managing future delivery schedules is a strategy for managing orders when demand exceeds capacity. The net effect of delayed deliveries, or back ordering, and reservations is to shift demand to a later period of time, often to a more slack period, which provides a smoothing effect for overall demand. However, the negative is that a percentage of orders will be lost as consumers are unwilling or unable to wait the additional amount of time. 4. Diversifying the product mix. Product mix diversification is a method used to offset demand seasonality. For example, a lawn mower manufacturing company may diversify into snow removal equipment to offset the seasonality of the lawn mower industry. What aggregate planning strategies influence supply?

Aggregate planning is also used to manage supply considerations by using the following strategies: 1. Subcontracting (outsourcing). Subcontracting is a method of increasing capacity without incurring large capital investment charges. It can turn the competitive advantage of other corporations to the contracting organization`s advantage. However, subcontracting can be costly, and also reveals part of the business to potential competitors. 2. Overtime and idle time. A direct short-term strategy for managing production capacity is to either increase or decrease the number of the work force. This strategy has the advantage of utilizing the currently existing work force. However, overtime is expensive and can produce job burnout if relied upon too extensively. On the other hand, enforcing idle time on the work force can result in resistance as well as a drop in morale. 3. Hiring and laying off employees. Hiring and laying off employees is a medium- to longterm strategy for increasing or decreasing capacity. Hiring employees usually involves the cost of training while laying off employees can incur severance charges. Laying off employees can also cause labor difficulties with unions and reduce morale 4. Stockpiling inventory. Accumulating inventory is a strategy for smoothing variances which may occur between demand and supply. 5. Part-time employees. Certain industries have seasonal requirements for lower skilled employees. Aggregate planning can be used to manage these seasonal requirements. What is the charting method of aggregate planning? Charting is a highly utilized trial-and-error aggregate planning method. It is relatively simple to use and is easily understood. Essentially, the charting approach uses a few variables in forecasting demand, applying current production capacity. While the charting method does not assure an accurate prediction, it is simple to implement requiring only minimal calculations. But trial and error method does not provide an optimal solution. The charting method requires five steps to implement: 1. Calculate each period`s demand. 2. Calculate each period`s production capacity for regular time, overtime, and subcontracting. 3. Determine all labor costs including costs for hiring and layoffs as well as the cost of holding inventory. 4. Evaluate organizational employee and stock policies. 5. Create optional policies and evaluate their costs. EXAMPLE 1.30 A Florida men`s suit manufacturer has created expected demand forecasts for the period June-January, as shown in Table 1.2.

The daily demand is calculated by dividing the total expected demand by the number of monthly working days:

AVERAGE DEMAND = TOTAL EXPECTED DEMAND / NUMBER OF PRODUCTION DAYSAggregate planning is a systems methodology having major organizational impacts. Every strategy has associated costs and benefits. Increasing hiring means increasing training costs and incurring associated employment benefit costs. Increasing inventory increases carrying costs consisting of capital and storage costs, deterioration, and obsolescence. Using part-time employees involves the costs and risks of using improperly trained and inexperienced personnel as well as creating possible union conflicts. Using subcontractors has the cost of exposing an organization to potential competitors. EXAMPLE 1.31 Using the data in example 1.30, it is possible to develop cost estimates for the men`s suit manufacturer. Basically, the manufacturer has three choices: 1. The manufacturer can meet expected monthly production fluctuations by varying the work force size, hiring and laying off employees as needed. In this scenario, an assumption is made that the men`s suit manufacturer has a constant staff of 55 employees. 2. Another alternative is to maintain a constant work force of 51 employees and subcontract for additional expected demand. 3. A third alternative is to maintain a work force of 69 employees and store suits during the slack demand months. Organizational Costs
Q4. Define spare parts management. What are the different classifications of service parts? Why do they differ?

Ans A spare part, spare, service part, repair part, or replacement part, is an interchangeable part that is kept in an inventory and used for the repair or replacement of failed parts. Spare parts are an important feature of logistics management and supply chain management, often comprising dedicated spare parts management systems.Capital spares are spare parts although acknowledged to have a long life or a small chance of failure would cause shutdown of equipment for a prolonged period because of the long delivery of their replacement.Spare parts are an outgrowth of the industrial development of interchangeable parts and mass production. In logistics, spare parts can be broadly classified into two groups, repairables and consumables. Economically, there is a tradeoff between the cost of ordering a replacement part and the cost of repairing a failed part. When the cost of repair becomes a significant percentage of the cost of replacement, it becomes economically favorable to simply order a replacement part. In such cases, the part is said to be "beyond economic repair" (BER), and the percentage associated with this threshold is known as the BER rate. Analysis of economic tradeoffs is formally evaluated using Level of Repair Analysis (LORA).
Repairable[edit] Main article: Repairable

Repairable parts are parts that are deemed worthy of repair, usually by virtue of economic consideration of their repair cost. Rather than bear the cost of completely replacing a finished

product, repairables typically are designed to enable more affordable maintenance by being more modular. This allows components to be more easily removed, repaired, and replaced, enabling cheaper replacement. Spare parts that are needed to support condemnation of repairable parts are known as replenishment spares. A rotable pool is a pool of repairable spare parts inventory set aside to allow for multiple repairs to be accomplished simultaneously. This can be used to minimize stockout conditions for repairable items.
Consumable[edit] Main article: Consumables

Parts that are not repairable, are considered consumable parts. Consumable parts are usually scrapped, or "condemned", when they are found to have failed. Since no attempt at repair is made, for a fixed MTBF, replacement rates for consumption of consumables are higher than an equivalent item treated as a repairable part. Because of this, consumables tend to be lower cost items. Because consumables are lower cost and higher volume, economies of scale can be found by ordering in large lot sizes, a so-called Economic order quantity.

Repair cycle[edit]
From the perspective of logistics, a model of the life cycle of parts in a supply chain can be developed. This model, called the repair cycle, consists of functioning parts in use by equipment operators, and the entire sequence of suppliers or repair providers that replenish functional part inventories, either by production or repair, when they have failed. Ultimately, this sequence ends with the manufacturer. This type of model allows demands on a supply system to ultimately be traced to their operational reliability, allowing for analysis of the dynamics of the supply system, in particular, spare parts.

Inventory management[edit]
Main articles: Logistic engineering and Supply chain management Cannibalization[edit] Main article: Cannibalization (parts)

When stockout conditions occur, cannibalization can result. This is the practice of removing parts or subsystems necessary for repair from another similar device, rather than from inventory. The source system is usually crippled as a result, if only temporarily, in order to allow the recipient device to function properly again. As a result operational availability is impaired.

Commercial[edit]
Industrialization has seen the widespread growth of commercial manufacturing enterprises, such as the automotive industry, and later, the computer industry. The resulting complex

systems have evolved modular support infrastructures, with the reliance on auto parts in the automotive industry, and replaceable computer modules known as FRUs.

Military[edit]
Main article: Military logistics

Military operations are significantly affected by logistics operations. The system availability, also known as mission capable rate, of weapon systems and the ability to effect the repair of damaged equipment are significant contributors to the success of military operations. Systems that are in a mission-incapable (MICAP) status due lack of spare parts are said to be "awaiting parts" (AWP), also known as not mission capable due to supply (NMCS). Because of this sensitivity to logistics, militaries have sought to make their logistics operations as effective as possible, focusing effort on operations research and optimal maintenance. Maintenance has been simplified by the introduction of interchangeable modules known as line-replaceable units (LRUs). LRUs make it possible to quickly replace an unserviceable (failed) part with a serviceable (working) replacement. This makes it relatively straightforward to repair complex military hardware, at the expense of having a ready supply of spare parts. The cost of having serviceable parts available in inventory can be tremendous, as items that are prone to failure may be demanded frequently from inventory, requiring significant inventory levels to avoid depletion. For military programs, the cost of spare inventory can be a significant portion of acquisition cost

Q5. Distinguish clearly between Material Requirement Planning (MRP I) and Manufacturing Resource Planning (MRP II). What are the principles of their operation?

Ans " Material requirements planning (MRP) and manufacturing resource planning (MRPII) are predecessors of enterprise resource planning (ERP), a business information integration system. The development of these manufacturing coordination and integration methods and tools made todays ERP systems possible. Both MRP and MRPII are still widely used, independently and as modules of more comprehensive ERP systems, but the original vision of integrated information systems as we know them today began with the development of MRP and MRPII in manufacturing. MRP ( and MRPII ) evolved from the earliest commercial database management package developed by Gene Thomas at IBM in the 1960s. The original structure was called BOMP ( bill-of-materials processor ), which evolved in the next generation into a more generalized tool called DBOMP (Database Organization and Maintenance Program). These were run on mainframes, such as IBM/360.

The vision for MRP and MRPII was to centralize and integrate business information in a way that would facilitate decision making for production line managers and increase the efficiency of the production line overall. In the 1980s, manufacturers developed systems for calculating the resource requirements of a production run based on sales forecasts. In order to calculate the raw materials needed to produce products and to schedule the purchase of those materials along with the machine and labor time needed, production managers recognized that they would need to use computer and software technology to manage the information. Originally, manufacturing operations built custom software programs that ran on mainframes. Material requirements planning (MRP) was an early iteration of the integrated information systems vision. MRP information systems helped managers determine the quantity and timing of raw materials purchases. Information systems that would assist managers with other parts of the manufacturing process, MRPII, followed. While MRP was primarily concerned with materials, MRPII was concerned with the integration of all aspects of the manufacturing process, including materials, finance and human relations. Like todays ERP systems, MRPII was designed to integrate a lot of information by way of a centralized database. However, the hardware, software, and relational database technology of the 1980s was not advanced enough to provide the speed and capacity to run these systems in real-time,[2] and the cost of these systems was prohibitive for most businesses. Nonetheless, the vision had been established, and shifts in the underlying business processes along with rapid advances in technology led to the more affordable enterprise and application integration systems that big businesses and many medium and smaller businesses use today (Monk and Wagner).

MRP and MRPII: General concepts[edit]

Material requirements planning (MRP) and manufacturing resource planning (MRPII) are both incremental information integration business process strategies that are implemented using hardware and modular software applications linked to a central database that stores and delivers business data and information. MRP is concerned primarily with manufacturing materials while MRPII is concerned with the coordination of the entire manufacturing production, including materials, finance, and human relations. The goal of MRPII is to provide consistent data to all players in the manufacturing process as the product moves through the production line. Paper-based information systems and non-integrated computer systems that provide paper or disk outputs result in many information errors, including missing data, redundant data, numerical errors that result from being incorrectly keyed into the system, incorrect calculations based on numerical errors, and bad decisions based on incorrect or old data. In addition, some data is unreliable in non-integrated systems because the same data is categorized differently in the individual databases used by different functional areas. MRPII systems begin with MRP, material requirements planning. MRP allows for the input of sales forecasts from sales and marketing. These forecasts determine the raw materials demand. MRP and MRPII systems draw on a master production schedule, the breakdown of specific plans for each product on a line. While MRP allows for the coordination of raw materials purchasing, MRPII facilitates the development of a detailed production schedule

that accounts for machine and labor capacity, scheduling the production runs according to the arrival of materials. An MRPII output is a final labor and machine schedule. Data about the cost of production, including machine time, labor time and materials used, as well as final production numbers, is provided from the MRPII system to accounting and finance (Monk and Wagner).
MRP (Material Requirements Planning)" is a concept of creating material plans and production schedules based on the lead times of a supply chain. However, even if you create an MRP-based plan based on an ideal factory model, problems may still actually occur. Traditional MRP (or MRP II: Manufacturing Resource Planning) and DRP-based planning are both techniques of supply chain management. If we collectively call those methods MRP-based supply chain planning, what are the characteristics and what are the differences between MRP-based supply chain planning and constraint-based supply chain planning? In MRP-based planning, demand plans i.e. sales plans, are created independently from constraints on production and material plans, and production plans are created based on the lead times of the supply chain. If a schedule is created by determining the "product remix", i.e. products to manufacture and their BOM (Bill of Materials) then exploding processes and imposing loads on each operation will result in a schedule that exceeds operation capacity because capacity constraints are not reflected on the schedule. If the operation capacity is sufficient then the MRP-based schedule will be an optimal just-intime schedule in which the lead time is minimized and throughput is maximized. However, in reality, it's often the case that materials are input and production schedules are carried out exceeding production capacity. This results in in-process inventory that waits for resources. Even with schedules created for an ideal factory, there will be in-process inventory that waits for resources, a build up of excess inventory occur and some operations that are suspended due to insufficient raw materials. If there is leeway in operation capacity, the MRP can be used as an initial plan and the difference between the schedule and the actual capacity can be solved by the schedule controlled by the shop floor. However, if you try to match MRP directly with actual production then demand should be adjusted so as not to exceed the actual capacity and you should repeatedly execute the MRP over and over again. Therefore, an extremely high-speed MRP system will be required.

Part C
Q1. What is the difference between variety reduction and standardization? Explain two methods of variety reduction that are commonly used in manufacturing industries. Ans Precisely separating the two terms known as standardisation and variety reduction is as difficult as separating research from development and mechanisation from automation. The exercise is barren. Both are concerned with the elimination of unnecessary diversity in any sphere of company operations. Standardisation is most commonly used in the sense of reducing a series of items all serving the same purpose to one item or a very few items, e.g. all inter-office memoranda to be written on A4 paper. Variety reduction is widely interpreted as a reduction in a range of items all serving the same or similar purposes by removing the least profitable and those with least user appeal. There is a wide overlap between this technique and standardisation (q.v.). Industrial agriculture of crops is a modern form of intensive farming that refers to the industrialized production of crops. Industrial agriculture's methods are technoscientific, economic, and political. They include innovation in agricultural machinery, farming methods, genetic technology, techniques for achieving economies of scale in production, the creation of new markets for consumption, patent protection of genetic information, and global trade. These methods are widespread in developed nations. Wheat (modern management techniques)[edit] Main article: Wheat

Wheat is a grass that is cultivated worldwide. Globally, it is the most important human food grain and ranks second in total production as a cereal crop behind maize; the third being rice. Wheat and barley were the first cereals known to have been domesticated. Cultivation and repeated harvesting and sowing of the grains of wild grasses led to the domestication of wheat through selection of mutant forms with tough ears which remained intact during harvesting, and larger grains. Because of the loss of seed dispersal mechanisms, domesticated wheats have limited capacity to propagate in the wild.[4] Agricultural cultivation using horse collar leveraged plows (3000 years ago) increased cereal grain productivity yields, as did the use of seed drills which replaced broadcasting sowing of seed in the 18th century. Yields of wheat continued to increase, as new land came under cultivation and with improved agricultural husbandry involving the use of fertilizers, threshing machines and reaping machines (the 'combine harvester'), tractor-draw cultivators and planters, and better varieties (see Green Revolution and Norin 10 wheat). With population growth rates falling, while yields continue to rise, the area devoted to wheat may now begin to decline for the first time in modern human history.[5] Organic wheat typically halves yield attainable but costs less as there are no fertiliser and pesticide costs. Seed costs are typically higher, however, and arguably labour and machinery costs are higher as the organic crop, and more importantly the whole rotation and cropping on such a farm, is more difficult to manage correctly.[citation needed] While winter wheat lies dormant during a winter freeze, wheat normally requires between 110 and 130 days between planting and harvest, depending upon climate, seed type, and soil conditions. Crop management decisions require the knowledge of stage of development of the crop. In particular, spring fertilizers applications, herbicides, fungicides, growth regulators are typically applied at specific stages of plant development. For example, current recommendations often indicate the second application of nitrogen be done when the ear (not visible at this stage) is about 1 cm in size (Z31 on Zadoks scale). Maize was planted by the Native Americans in hills, in a complex system known to some as the Three Sisters: beans used the corn plant for support, and squashes provided ground cover to stop weeds. This method was replaced by single species hill planting where each hill 60 120 cm (24 ft) apart was planted with 3 or 4 seeds, a method still used by home gardeners. A later technique was checked corn where hills were placed 40 inches (1,000 mm) apart in each direction, allowing cultivators to run through the field in two directions. In more arid lands this was altered and seeds were planted in the bottom of 1012 cm (45 in) deep furrows to collect water. Modern technique plants maize in rows which allows for cultivation while the plant is young, although the hill technique is still used in the cornfields of some Native American reservations.In North America, fields are often planted in a two-crop rotation with a nitrogen-fixing crop, often alfalfa in cooler climates and soybeans in regions with longer summers. Sometimes a third crop, winter wheat, is added to the rotation. Fields are usually plowed each year, although no-till farming is increasing in use. Many of the maize varieties grown in the United States and Canada are hybrids. Over half of the corn area planted in the United States has been genetically modified using biotechnology to express agronomic traits such as pest resistance or herbicide resistance. Before about World War II, most maize in North America was harvested by hand (as it still is in most of the other countries where it is grown). This often involved large numbers of workers and associated social events. Some one- and two-row mechanical pickers were in use

but the corn combine was not adopted until after the War. By hand or mechanical picker, the entire ear is harvested which then requires a separate operation of a corn sheller to remove the kernels from the ear. Whole ears of corn were often stored in corn cribs and these whole ears are a sufficient form for some livestock feeding use. Few modern farms store maize in this manner. Most harvest the grain from the field and store it in bins. The combine with a corn head (with points and snap rolls instead of a reel) does not cut the stalk; it simply pulls the stalk down. The stalk continues downward and is crumpled into a mangled pile on the ground. The ear of corn is too large to pass through a slit in a plate and the snap rolls pull the ear of corn from the stalk so that only the ear and husk enter the machinery. The combine separates the husk and the cob, keeping only the kernels.

Q2. Why workforce management is critical to the success of JIT implementation? Explain with examples. Ans The just-in-time (JIT) concept of inventory management is beneficial in terms of reduced short-term costs
but it has its drawbacks such as inflexibility as to supplier source and consequent vulnerability to sudden shifts in market situation. JIT relies on employee suggestions for its financial analysis which is good in itself although financial managers may resent such a development because it diminishes their usefulness. The concept is a laud In the early 1980's a new concept, known as zero inventories" was introduced to the American manufacturing industry. The "zero inventories" concept called for the transportation of materials from the outside vendors directly to the work-in-process area, where the required value added(*) through the manufacturing operations occurred, followed by the shipping of the finished products out of the door, all at a reasonable rate of time. This "zero inventories" concept would save companies the costs of inspection, stocking, material handling, inventory tracking, carrying the inventory, and the risks of damage and obsolescence. The concept now formally termed just-in-time (JIT) inventory has evolved into a corporate philosophy that seeks to do the process right the first time and to eliminate any non-value added activities.(1) The time a part is delayed, moved, or inspected is referred to as non-value added time. It is waste time because no value is created for the customer when the product is not being processed. Under the JIT concept activities such as moving parts, waiting for parts, machine setup, and inspection are referred to as non-valued added activities. Inefficiencies in production cause non-value added activities. There are three basic stages of what JIT is and how JIT works. These stages are termed: (1) Kanban, (2) Production planning, and (3) Global management philosophy. Organizations claim that they are using JIT when they are at any of these stages. In reality, these are not three separate stages but rather a migration path from using JIT simply as a shop-floor-control tool (Kanban) to the installation of a factory wide global management philosophy. In stage one which is the simplest form, JIT is a shop floor-control tool that allows the scheduling of inventory movement through the shop floor with the use of a Kanban, a materials movement tracking device. The Kanban can take the form of a card, a box, or a marked off area on the floor. These Kanbans are used as an authorization to move materials or to produce new product. This initial stage of JIT should generate impressive reductions in work-in-process inventory because of the direct uninterrupted movement of materials between work stations. The second stage of JIT, production planning, focuses on the basic principle of receiving production parts as needed, rather than building up inventories of these components. Using the JIT production planning approach, managers reduce inventory to a minimum level, keeping on hand only the amount needed in production until the

next order arrives. This approach eliminates the double handling of products which occurs when storage is relocated to the work area or shipping area. The JIT production stage is driven by having continuous delivery of items. The use of production planning eliminates the need for material requirements planning (MRP) as a production planning tool. In contrast to the JIT system, a MRT system is a "push-through" system driven by forecasted demand. It examines the finished goods requirements before determining the demand for raw materials, components, and subassemblies. The purpose of MRP is to maintain the lowest possible level of inventory while making certain materials and parts are available. In production planning, detailed bill-of-materials for the manufacturing process which authorize the movement of materials or parts from storage to work areas, are no longer needed. The lead time in JIT is dramatically different. In a large production type environment, lead time may be reduced from months to hours. With such a short time horizon, it is easy to determine what parts will be needed each day. Another important part of the planning environment in JIT involves the long-term contractual relationships which are established with vendors. These relationships will eliminate the need for purchase requisitions and purchase orders. A last critical part of the production planning process in JIT is that quality evaluations are performed differently. Quality is part of the manufacturing process. Every employee is a quality inspector. Inspection is done before the work is started and after it is finished. This process is referred to as inline quality control or total quality control. The third basic stage of JIT, global management philosophy, is something that affects every aspect of a manufacturing environment. Costing through the use of standards has been eliminated; only actual costs are used. Inventory tracking has been eliminated; inventory should be kept to a minimum. In management styles, the concepts of management circles, bottom-up management, statistical management, and long-run planning become important. In facilities planning strategies, JIT offers suggestions about factory planning, technology specialization, and resource sharing.(2)able one but it has to be implemented well to avoid sacrificing long-term stability with short-term goals

Q3. What are the different types of inventory control? Discuss the method of inventory control you would use as, (a) a medium scale industry manufacturing tools, (b) an assembly line unit manufacturing automobiles. Explain the inventory control method chosen by you and the reasons for the choice.

Ans Henry Ford was one of the first people to develop the ideas behind Lean Manufacturing. He used the idea
of "continuous flow" on the assembly line for his Model T automobile, where he kept production standards extremely tight, so each stage of the process fitted together with each other stage, perfectly. This resulted in little waste. But Ford's process wasn't flexible. His assembly lines produced the same thing, again and again, and the process didn't easily allow for any modifications or changes to the end product a Model T assembly line produced only the Model T. It was also a "push" process, where Ford set the level of production, instead of a "pull" process led by consumer demand. This led to large inventories of unsold automobiles, ultimately resulting in lots of wasted money. Other manufacturers began to use Ford's ideas, but many realized that the inflexibility of his system was a problem. Taiichi Ohno of Toyota then developed the Toyota Production System (TPS), which used Just In Time manufacturing methods to increase efficiency. As Womack reported in his book, Toyota used this process successfully and, as a result, eventually emerged as one the most profitable manufacturing companies in the world. Lean Manufacturing Basics

Lean manufacturing is based on finding efficiencies and removing wasteful steps that don't add value to the end product. There's no need to reduce quality with lean manufacturing the cuts are a result of finding better, more efficient ways of accomplishing the same tasks. To find the efficiencies, lean manufacturing adopts a customer-value focus, asking "What is the customer willing to pay for?" Customers want value, and they'll pay only if you can meet their needs. They shouldn't pay for defects, or for the extra cost of having large inventories. In other words, they shouldn't pay for your waste. Waste is anything that doesn't add value to the end product. In Lean Manufacturing, there are eight categories of waste that you should monitor: 1. 2. 3. 4. 5. 6. 7. 8. Overproduction Are you producing more than consumers demand? Waiting How much lag time is there between production steps? Inventory (work in progress) Are your supply levels and work in progress inventories too high? Transportation Do you move materials efficiently? Over-processing Do you work on the product too many times, or otherwise work inefficiently? Motion Do people and equipment move between tasks efficiently? Defects How much time do you spend finding and fixing production mistakes? Workforce Do you use workers efficiently?

Note: The first seven sources of waste were originally outlined in the Toyota production system, and were called "muda." Lean Manufacturing often adds the eighth "workforce" category. Lean Manufacturing gives priority to simple, small, and continuous improvement such as changing the placement of a tool, or putting two workstations closer together. As these small improvements are added together, they can lead to a higher level of efficiency throughout the whole system. (Note that this emphasis on small improvements doesn't mean that you cannot make larger improvements if they are required!) Note: Although the aim of Lean Manufacturing is to remove as much waste as possible by continuously refining your processes, you probably won't eliminate waste completely. Lean Manufacturing Process The Lean Manufacturing process has three key stages: Stage 1 Identify Waste According to the Lean Manufacturing philosophy, waste always exists, and no matter how good your process is right now, it can always be better. Lean Manufacturing relies on this fundamental philosophy of continuous improvement, known as Kaizen . One of the key tools used to find this waste is a Value Stream Map (VSM). This shows how materials and processes flow through your organization to bring your product or service to the consumer. It looks at how actions and departments are connected, and it highlights the waste. As you analyze the VSM, you'll see the processes that add value and those that don't. You can then create a "future state" VSM that includes as few non-valueadding activities as possible. Stage 2 Analyze the Waste, and Find the Root Cause For each waste you identified in the first stage, figure out what's causing it by using Root Cause Analysis . If a machine is constantly breaking down, you might think the problem is mechanical and decide to purchase a new machine. But Root Cause Analysis could show that the real problem is poorly trained operators who don't use the machine properly. Other effective tools for finding a root cause include Brainstorming and Cause and Effect Diagrams .

Stage 3 Solve the Root Cause, and Repeat the Cycle Using an appropriate problem-solving process, decide what you must do to fix the issue to create more efficiency.

Q4. What do you understand by demand amplification? How does it come about? What are its implications on finished goods inventory?

Ans Production leveling, also known as production smoothing or by its Japanese original term heijunka is a technique for reducing the muda (waste). It was vital to the development of production efficiency in the Toyota Production System and lean manufacturing. The goal is to produce intermediate goods at a constant rate so that further processing may also be carried out at a constant and predictable rate. On a production line, as in any process,[2] fluctuations in performance increase waste. This is because equipment, workers, inventory and all other elements required for production must always be prepared for peak production. This is a cost of flexibility. If a later process varies its withdrawal of parts in terms of timing and quality, the range of these fluctuations will increase as they move up the line towards the earlier processes. This is known as demand amplification. Where demand is constant, production leveling is easy, but where customer demand fluctuates, two approaches have been adopted: 1) demand leveling and 2) production leveling through flexible production. To prevent fluctuations in production, even in outside affiliates, it is important to minimize fluctuation in the final assembly line. Toyota's final assembly line never assembles the same automobile model in a batch. Instead, they level production by assembling a mix of models in each batch[3] and the batches are made as small as possible. This is in contrast to traditional mass production, where long changeover times meant that it was more economical to punch out as many parts in each batch as possible. When the final assembly batches are small, then earlier process batches, such as the press operations, must also be small and changeover times must be short. In the Toyota Production System die changes (changeovers) are made quickly (SMED). In the 1940s changeovers took two to three hours, in the 1950s they dropped from one hou Even Toyota haven't reached the final stage in this journey, single-piece flows, across all of their processes; indeed they recommend following their journey rather than trying to jump into an intermediate stage. The reason Toyota advocate this is that each production stage is accompanied by adjustments and adaptations to support services to production; if those services are not given these adaptation steps then major issues can arise.
1. Implement green stream/red stream or fixed sequence, fixed volume to establish the entry and exit criteria for products from these streams and establish the supporting disciplines in the support services. The cycle established will produce Every Product Every Cycle (EPEC). This is a specific form of Fixed Repeating Schedule. Green stream products are those with predictable demand, Red stream products are high value unpredictable demand products. 2. Faster fixed sequence with fixed volume keep the streams the same but use the now established familiarity with the streams to maximise learning and improve speed of production (economies of repetition). This will allow the shortening of the EPEC cycle so that the plant is now producing every product every 2 weeks instead of month and then later on repeating every week. This may require support services to speed up as well.

3. Fixed sequence with unfixed volume keep the stream sequences the same but now phase in allowing actual sales to influence volumes within those sequences. This affects inbound componentry as well as support services. This is a more generalised form of Fixed Repeating Schedule. 4. Unfixed sequence with fixed volume the stream sequences, and EPEC, can now be gradually flexed but move to small fixed batch sizes to make this more manageable. 5. Unfixed sequence with unfixed volume finally move to true single piece flow and pull by reducing batch sizes until they reach one.

Demand leveling[edit]
Demand leveling is the deliberate influencing of demand itself or the demand processes to deliver a more predictable pattern of customer demand. Some of this influencing is by manipulating the product offering, some by influencing the ordering process and some by revealing the demand amplification induced variability of ordering patterns. Demand levelling does not include influencing activities designed to clear existing stock. Historically demand leveling evolved as subset of production levelling and has been approached in a variety of ways:

The first approach to demand levelling involves careful management of the sales pipeline. For this method of demand management it is instructive to look at Toyota in its home market, Japan. Toyota sales teams sell cars door-to-door whereby they build customer profiles and relationships. The sales process is low intensity but includes test drives, financing, insurance and trade-in deals.[5] The sale itself is by special order placed with their representative. This means that orders can be predicted reasonably accurately in terms of vehicle numbers some way in advance. Finer specific vehicle details may only become known with the order. However, the order is often for delivery in the future so these details can usually be planned before build. Because the customer is getting the exact car they want there is less negotiation around price as indeed the fact that the build is to order removes the incentive of the manufacturer, or their agent, to discount existing stock. The aim of this system is to maximise the revenue from the customer in the long term. This leads to the sales team handling after-sales issues of diverse kinds for an extended period to keep customer loyalty and the relationship which will sell the next car. Between purchases the sales team remain in touch for all aspects of customer satisfaction with their cars including feedback for product design on changing customer preferences in the market. The Japanese market does not have the seasonal, promotional or other demand surges that are a characteristic of Western automotive markets. It is debated, for both markets, whether this is caused by manufacturers' behaviour or whether manufacturers' behaviour is a logical response to it. A second approach to demand levelling is by deep understanding of the systems used to order products by retailers and other sellers from manufacturers. Even where this supply chain is very simple, customer-retailer-manufacturer, it is usually the case that orders are based on some form of economic order quantity (EOQ) calculation that aggregates actual customer demand over a certain period. This aggregation, and the other clever calculations that may be involved, often obscure the fact that actual demand for a product is close to flat, and for high volume products very close to flat. The demand pulsing effect is created by the ordering process and the more complex it is the greater this effect. The use of EPOS actual sales data can reveal this effect very clearly.

A third approach to demand management is to keep of finished goods or nearly finished goods in stock to act as a buffer and thus isolate the production facility from actual demand. This approach is widely used today but its weakness is becoming more and more evident as a growing variety of products is demanded. The cost of making, storing, managing and protecting finished goods stock can grow to be prohibitive depending upon product range and demand variability levels. This usually means that actually whilst stocks are kept they are insufficient to meet the stated aims and so customer dissatisfaction ensues along with distressed sales (reduced price) to eliminate stock levels seen as too high.

Implementation[edit]

If it is accepted that a large part of demand variability in high volume products can be substantially caused by sales and ordering process artifacts then analysis and leveling can be attempted. The use of long delay supply chains to reduce manufacturing costs often means that production orders are placed long before customer demand can be realistically estimated. The much later arrival of forecast product demand volumes makes demand leveling irrelevant since the issue has now switched to disposal at best price possible products that are already created and possibly paid for. Demand leveling has only proven possible where build times have been made relatively low and production has been made relatively reliable and flexible. Examples of these are fast airborne supply chains (e.g. Apple iPod) or direct to customer selling through web sites allowing late customisation (e.g. NIKEiD custom shoes) or local manufacture (e.g. Timbuk2 custom courier bags). Where actual build-delivery times can be brought within the same scale as customer time horizons then effort to modify impulse buying and make it somewhat planned can be successful. Reliable, flexible manufacturing will then mean that low stock levels (if any) do not interfere with customer satisfaction and that incentives to sell what has been produced eliminated. Where demand follows a predictable pattern, e.g. flat, then regular deliveries of constant amounts can be agreed with variances in actual demand ignored unless it exceeds some agreed trigger level. Where this cannot be agreed then it can be simulated and the benefits gained through frequent deliveries and a market location. The predictable pattern does not have to be flat and may, for example, be an annual pattern with higher volumes at particular periods. Here again the deliveries can be agreed to follow a simplified but similar pattern, perhaps one delivery volume for six months of the year and another for the other six months r to 15 minutes, now they take three minutes

Q5. What are the different maintenance policies? Which policy would you adopt if you were running a job shop? Would you adopt a different policy if you were running a process plant? Explain the reasons for your answer.

Ans A Massachusetts man lost his job at a Scotts Miracle-Gro lawn and garden center

in 2006 when a routine drug test came back positive. The finding: nicotine. Company leaders were cracking down on smoking and other unhealthy behaviors they saw as bad for the bottom line. That same program saved another Scotts employees life. In this case, the worker following the advice of a company-paid health coachhad some medical tests done and discovered that he was likely just days away from a massive heart attack. Two stents inserted into his coronary arteries saved him from a life-threatening blockage. These are just two examples of how U.S. employers are dangling carrots and swinging sticks to prod workers to change their behavior and better their health. Companies have long had an interest in keeping workers healthy, productive, and satisfied while cutting health-care and insurance costs. Increasingly, though, they are using incentivesand disincentivesto rein in these costs runaway growth. So far, tobacco use and obesity are getting the most attention. To prompt workers to stop smoking and lose weight, employers are, among other things:

adopting no-tobacco policies on and off the job offering cash-incentive payments and gift cards reimbursing workers for gym memberships providing free health coaching offering insurance-premium discounts to those who meet health standards and surcharges to those who dont

According to a 2008 national survey by Harris Interactive, 91 percent of employers believed they could reduce their health care costs by influencing employees to adopt healthier lifestyles, wrote two Harvard School of Public Health (HSPH) experts in the July 10, 2008 issue of the New England Journal of Medicine. Michelle Mello, a professor of law and public health in the Department of Health Policy and Management, and colleague Meredith B. Rosenthal, an HSPH associate professor of health economics and health policy, spelled out the legal parameters of employersponsored wellness programs as they stand today.

According to surveys cited by Mello and Rosenthal, 19 percent of employers with 500 or more employees offered wellness programs as of 2006. Almost 40 percent said they planned to offer monetary rewards for healthy behaviors within two years.

BY THE RULES Employee wellness programs have been around for decades. But one likely impetus for these programs to offer a new round of health incentives was the issuing, in December of 2006, of final rules on group health plans under the Health Insurance Portability and Accountability Act (HIPAA). These rules reduced the uncertainty about what was legally permissible, which was probably holding some insurers back from moving in this direction, Mello says. Among other things, HIPAA limits the value of incentives that group health plans can offer to less than 20 percent of the total cost of health insurance (meaning premiums paid by both employer and employee). This rule allows for up to $2,420 for a family insurance policy costing $12,100 a year. HIPAA rules also distinguish between incentives based on participation in a program and incentives based on achieving certain health standards, such as quitting smoking or attaining a healthier weight as reflected by the body mass index (BMI).* There are caveats, however. If the reward is tied to achieving a health standard but theres no alternative standard available to people who cant reasonably be expected to meet that standard, it would violate HIPAA, Mello notes. Assume, then, by way of example, that Company X requires its employees to be nonsmokers and have a BMI under 30. The companys rationale, backed by the medical literature, would be that (a) people who smoke are more likely to develop heart disease, lung cancer, and other costly and debilitating diseases and (b) those with a higher BMI are likely to develop these as well as other problems, such as diabetes, all of which could erode their productivity and ratchet up their and the companys health care costs. HIPAA might allow the incentive to help slightly obese

workers reach a BMI under 30; however, the law would also require that morbidly obese workers receive the same incentive to meet a less drastic and more realistic target BMI. All of this is perfectly legal, as long as group health plans abide by HIPAA and insurers and employers abide by the Americans with Disabilities Act, plus other applicable federal and state laws. Its rare for courts to find that obesity constitutes a disability under the Americans with Disabilities Act, Mello says. Courts have also consistently found that nicotine or tobacco use does not constitute a disability. She and Rosenthal point out, however, some courts have ruled morbid obesity to be an impairment if it can be linked to a physiological cause. Still other federal laws governing health incentive plans include civil rights laws, pay and age discrimination laws, the Employee Retirement Income Security Act (ERISA), and the tax code. State laws may also limit a companys ability to impose health standards. Several states have statutes that explicitly disallow hiring or firing workers based on their tobacco use.

Case study -1
Q1. What is the optimal inventory level for the year ahead using EOQ model? Ans Inventory constitutes the most significant part of current assets of larger majority of Nigerian manufacturing industries. Because of the relative largeness of inventories maintained by most firms, a considerablesum of an organizations fund is being committed to them. It thus becomes absolutely imperative to manageinventories efficiently so as to avoid the costs of changing production rates, overtime, sub-contracting, unnecessarycost of sales and back order penalties during periods of peak demand. The main objective of this study is to determinewhether or not inventories in the Nigeria Bottling Company, Ilorin Plant can be evaluated and understood using thevarious existing tools of optimization in inventory management. The study methods employed include the varianceanalysis, Economic Order Quantity (EOQ) Model and the Chi-square method. The answer to the fundamental question of how best an organization which handles inventory can be efficiently run is provided for in the analysis andfindings of the study. Consequently, recommendations on the right quantity, quality and timing of material, at the most favourable price conclude the research study. Q2. Compute the total inventory cost to the business? Ans

Cost per Unit per Year (C) = Fixed Cost per Order (F) =

1350 20

Units Demand per Year (D) = Order Quantity (Q) =

Reset

1300 30

Total Inventory Cost (TIC) =

21850

Q3. What is the optimal number of orders to be placed and optimal number of supply days required per order to meet the business requirement?

Ans (a) The Federal Supply Schedule program is also known as the GSA Schedules Program or the Multiple Award Schedule Program. The Federal Supply Schedule program is directed and managed by GSA and provides Federal agencies (see 8.002) with a simplified process for obtaining commercial supplies and services at prices associated with volume buying. Indefinite delivery contracts are awarded to provide supplies and services at stated prices for given periods of time. GSA may delegate certain responsibilities to other agencies (e.g., GSA has delegated authority to the VA to procure medical supplies under the VA Federal Supply Schedules program). Orders issued under the VA Federal Supply Schedule program are covered by this subpart. Additionally, the Department of Defense (DoD) manages similar systems of schedule-type contracting for military items; however, DoD systems are not covered by this subpart. (b) GSA schedule contracts require all schedule contractors to publish an Authorized Federal Supply Schedule Pricelist (pricelist). The pricelist contains all supplies and services offered by a schedule contractor. In addition, each pricelist contains the pricing and the terms and conditions pertaining to each Special Item Number that is on schedule. The schedule contractor is required to provide one copy of its pricelist to any ordering activity upon request. Also, a copy of the pricelist may be obtained from the Federal Supply Service by submitting a written e-mail request to or by telephone at 1-800-488-3111. This subpart, together with the pricelists, contain necessary information for placing delivery or task orders with schedule contractors. In addition, the GSA schedule contracting office issues Federal Supply Schedules publications that contain a general overview of the Federal Supply Schedule (FSS) program and address pertinent topics. Ordering activities may request copies of schedules publications by contacting the Centralized Mailing List Service through the Internet submitting written e-mail requests or by completing GSA Form 457, FSS Publications Mailing List Application, and mailing it to the GSA Centralized Mailing List Service (7SM), P.O. Box 6477, Fort Worth, TX 76115. Copies of GSA Form 457 may also be obtained from the abovereferenced points of contact. (c)(1) GSA offers an on-line shopping service called GSA Advantage! through which ordering activities may place orders against Schedules. (Ordering activities may also use GSA Advantage! to place orders through GSAs Global Supply System, a GSA wholesale supply source, formerly known as GSA Stock or the Customer Supply Center. FAR Subpart 8.4 is not applicable to orders placed through the GSA Global Supply System.) Ordering activities may access GSA Advantage! through the GSA Federal Supply Service or the GSA Federal Supply Schedule.. (2) GSA Advantage! enables ordering activities to search specific information ( i.e., national stock number, part number, common name), review delivery options, place orders directly with Schedule contractors (except see 8.405-6) and pay for orders using the Governmentwide commercial purchase card. (d)(1) e-Buy, GSAs electronic Request for Quotation (RFQ) system, is a part of a suite of on -line tools which complement GSA Advantage!. E-Buy allows ordering activities to post requirements, obtain quotes, and issue orders electronically. Posting an RFQ on e-Buy (i) Is one medium for providing fair notice to all schedule contractors offering such supplies and services as required by 8.405-1, 8.405-2, and 8.405-3; and (ii) Is required when an order contains brand-name specification

Q4. Assuming that the average lead time was 2 weeks determine the optimal level of safety stock to be maintained?

Ans If the lead time was 2 weeks I might carry 3 or 4 weeks. I soon learned that demand for some inventory items is more volatile than for others, and some suppliers less reliable than others. Id rather have too much then not enough, and Id never gotten in trouble for having a little too much. Over at QuickMBA ; To calculate the safety stock, first calculate the standard loss function, designated as L(z). This function is dependent on the values of the desired fill rate f, the demand and its standard deviation , the time between orders p, and the replenishment lead time l : L(z) = ( 1 f ) p / ( p + l )1/2. Once L(z) is known, z can be found in a look-up table and the safety stock can be calculated by:
Safety Stock = z ( p + l )1/2 Heres a new one recently published by Kent Linford in the APICS Magazine Nov/Dec 2006. SS = [( FE)2 x (LTI/FI)beta + ( LT)2 x D2] x Z x (FI/OCI)beta Where: SS = safety stock FE = forecast error LT = lead time interval FI = forecast interval (pick a beta between 0.5 and 0.7) D = average demand during lead time Z = normal distribution service factor based on desired service level OCI = order cycle interval Dave Piasecki at InventoryOps.com uses; safety stock = (standard deviation)*(service factor)*(lead-time factor)*(order cycle

factor)*(forecast-to-mean-demand factor)
Jon Schreibfeder has another approach. And so too does Joanns Vermorel.

Michel Baudin has a nice piece on safety stock in an article titled Beware of Formulas.

Accounting Explained has this one

Safety Stock = (Maximum Daily Usage Average Daily Usage) Lead Time

Q5.Assuming that the supplier offers a quantity discount of Rs.2 per unit, provided the or der size exceeds 5000 units, what will be incremental profit caused by change in inventory level decision? Ans ) B - Rs. 5000 unit

Margin of safety = Profit/ P/V Ratio = 30/0.40 = Rs. 75 lakhs 0.25 of sales = Rs. 75 lakhs Hence, Sales = 75/0.25 = Rs. 300 lakhs

Case study -2
a. Forecast the demand for pizza for June 23 to July 14 by using the simple moving average method with n = 3. Ans Using the formulas for the measures, we get Cumulative forecast error (bias CFE =-15 Average forecast error (mean bias): E = CFE/n=-1.875 b. Repeat the forecast by using the weighted moving average method with n=3 and weights of 0.50, 0.30, and 0.20, with 0.50 applying to the most recent demand. Ans t Ft 1 Wi Di

i 1

Wi = weight for period i, [0%, 100%]

Wi = 1.00
With the demand data in Example 2, forecast the demand for pizza by using WMA method with n = 3 and weights of 0.50, 0.30, and 0.20, with 0.50 applying to the most recent demand c. Calculate the MAD for each method. Ans The Mean Absolute Deviation is calculated in three simple steps.
1) Determine the Mean: Add all numbers and divide by the count example: the weights of the following three people, denoted by letters are A - 50 Kgs B - 65 C - 56 Mean = (56+60+65)/3 = 57 2) Determine deviation of each variable from the Mean i.e 56-74.6 = -18.67 78-74.6= 3.33 90-74.6 =15.33 3) Make the deviation 'absolute' by squaring and determining the roots i.e eliminate the negative

aspect Thus the Mean Absolute Deviation is (18.67 +3.33+15.33)/3 =12.4