materials management & maintenance slides 109 to 145

7/27/2019 Materials Management & Maintenance Slides 109 to 145

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Management ofMaterials ,Machines & Equipments, and

Quality

Module V

Production Management

1CRG @ AIM - Production Management2012


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Materials Management

A process encompassing acquisition, shipping, receiving,

evaluation, warehousing and distribution of goods, supplies

and equipment

It is concerned with planning, organizing and controlling the

flow of materials from their initial purchase through internal

operations to the service point through distribution

Material management is a scientific technique, concerned

with Planning, Organizing &Control of flow of materials, from

their initial purchase to destination



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Suppliers

Customers

Enterprise

PurchasingOrders

Raw-material

Storage

R

eceiving Transformation

Processes

In-process

Storage

DI

st

rIbutIon

Finished

-goods

Storage

Purchase Requisition

from Functional Dept



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AIM OF MATERIAL MANAGEMENT

To achieve:

1. The Right quality of materials

2. Right quantity of supplies

3. At the Right time

4. At the Right place

5. For the Right cost

PURPOSE OF MATERIAL MANAGEMENT

To gain economy in purchasing

To satisfy the demand during period of replenishmentTo carry reserve stock to avoid stock out

To stabilize fluctuations in consumption

To provide reasonable level of client services



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Primary

Right price High turnover

Low procurement & storage cost

Continuity of supply

Consistency in quality

Good supplier relations Development of personnel

Good information system

Objectives of Materials Management

SecondaryForecasting

Inter-departmental harmony

Product improvement

Standardization Make or buy decision

New materials & products

Favorable reciprocal relationships



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Materials Management functions

1. Material planning and programming

2. Purchasing and outsourcing (make or buy decision)

3. Receiving & Storekeeping

4. Inspection and quality control

5. Inventory control

6. Codification

7. Vendor rating and management

8. Distribution / Transportation and material handling

9. Cost reduction through value analysis

10. Disposal of surplus / obsolete material

11. Distribution



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Costs associated with


Cost of Materials

Cost of Ordering

Carrying or Storage Costs

Cost of Packaging

Cost of Material Handling

Cost of Shipment

Cost of Insurance Taxes and Govt. duties



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Purchasing

Purchasing (also known as Procurement) is the acquisition of

goods and services needed to support the various activities ofan organization, at the optimum cost and from reliable

suppliers

Purchasing is the procuring of materials, supplies, machine

tools & services required for the equipment, maintenance &operation of a manufacturing plant

It is not a service function, but a profit making activity

Goal of Purchasing

Develop and implement purchasing plans for products and

services that support operations strategies and cost objectives



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Make-or-Buy Analysis

Considerations in make-or-buy decisions:

Lower cost : purchasing or production?

Better quality: supplier or in-house?

More-reliable deliveries: supplier or in-house?

What degree of backward integration is desirable?

Should distinctive competencies be outsourced?



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Principles of Sound Purchasing(5-R framework)

5 Rs OF BUYINGRIGHT

SOURCE

RIGHT

TIME

RIGHT

PRICE

RIGHT

QUALITY

RIGHT

QUANTITY



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Purchasing

Legal

AccountingOperations

Data

processing

Design

ReceivingSuppliers



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Purchase

REQUISITION

SELECT SUPPLIER /

Vendor rating

PLACE THE ORDER

RECEIVE ORDER MONITOR ORDER

Purchasing Cycle



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Different Purchase Policies

Centralized vs. Decentralized Purchasing

Single sourcing vs. Multi-sourcing



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Inventory Management

Inventory refers to all the materials, parts, suppliers, expenses

and in process or finished products recorded on the books by

an organization and kept in its stocks, warehouses or plant for

some period of time

A physical resource that a firm holds in stock with the intent

of selling it or transforming it into a more valuable state

Raw Materials

Works-in-Process

Finished Goods

Maintenance, Repair and Operating (MRO)



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Inventory System - A set of policies and controls that

monitors levels of inventory and determines whatlevels should be maintained, when stock should be

replenished, and how large orders should be

Inventory control is the technique of maintaining the

size of the inventory at some desired level keeping in

view the best economic interest of an organization



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Nature or Classification of Inventory

By Function:

Transit or Pipeline Inventory (inventory in transit)

Decoupling Inventory (inventory used to break thelinkage between two consecutive processing stages)

Buffer Inventory (to protect from price hikes,uncertainties in demand & supply, etc.)

Cycle Inventory (to take advantage of quantity discounts

or EOQ)

By Nature

Raw materials / Work in-process / Finished goods /

Spare parts & Supplies 16CRG @ AIM - Production Management2012


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Reasons for carrying Inventory

Service the customers with immediate & seasonal demands

Protect against supply errors, shortages, stock-outs, poor

forecasts, etc.

Level production activities stabilize employment and improve

labour relations

Decouple successive stages in production process so that

breakdowns do not stop the entire production run

A means for attaining economy in purchasing

Hedge against future price changes, strikes, etc.



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Dependent & Independent Inventory

Independent demand - the demand for item is independentof the demand for any other item in inventory

Dependent demand - the demand for item is dependent

upon the demand for some other item in the inventory

Stock of Raw materials, Components & Sub-assemblies

depends on the demand for the end item

Stock of finished products, spares, etc. directly related to the

uncertain market environment



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Inventory Costs

1. Ordering / Set up Cost(cost of placing order,inspection, changing or setting up facilities to produce in-

house)

2. Carrying / Holding / Storage Cost (cost ofinfrastructure, handling, storage, security, insurance, etc.)

3. Purchase Cost (cost of materials)

Hence,Total Cost of Inventory = Ordering Cost + Carrying Cost +

Cost of Material



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Maximum inventory level

Usage rate Averageinventory on

hand

Q2

Minimuminventory

Inventorylevel

Time0

Classical Inventory Control System

Order quantity = Q

Q Q



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1. Demand is known, constant, and independent

2. Lead time is known and constant3. Receipt of inventory is instantaneous and

complete

4. Quantity discounts are not possible

5. Only variable costs are setup and holding

6. Stock-outs can be completely avoided

Important assumptions

of Classical Inventory Model



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Typical Inventory Control System



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Economic Order Quantity (EOQ)

The quantity ordered every time in order to

minimize the total inventory costs

Literally, its the quantity ordered to bring in

economy to the cost center



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Annu

alcost

Order quantity

Holding cost curve

Minimumtotal cost

Optimal order

quantity (Q)

EOQ Diagrammatic Representation



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Terms used in Inventory Control System

Costs of Inventory (OC, CC, COM)

Annual Demand (D) Quantity ordered every time (EOQ: Q)

Re-Order Level or Point (ROL / ROP): the level of stock at

which a fresh purchase order is initiated; if not done at this

point, it may lead to stock-out Lead Time (LT): Time gap between placing the ordering and

receiving the material

Lead Time Demand (LTD): Demand during the lead time

Safety or Buffer Stock (SS): Stock maintained to manage thefluctuations in consumption (LTD) and / or lead time

Stock-out: stock gets exhausted

Back Order: Processing an order of the customer who is

willing to wait 25CRG @ AIM - Production Management2012


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To derive an equation for EOQ

Let D be the demand / year, C be the Cost of Material / unit, Co be

the Cost / Order, Cc be the Carrying Cost / unit / year, Q be theQuantity ordered or purchased every time, then

Total Cost of Inventory = Ordering Cost + Carrying Cost + Cost of Material

Ordering Cost = No. of Orders x Cost / Order

OC = D/Q x CoCarrying Cost = No. of units carried / year x Carrying cost / unit/year

CC = (Q/2) x Cc

Cost of Material = No. of Units purchased / year x Cost of Material / unit

COM = D x C

TC(I) = [(D/Q) x Co] + [(Q/2) x Cc] + [D x C]



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Applying Maxima-Minima method: differentiate the TC(I) w.r.to Q;

dTC/dQ = (-D x Co) /Q2 ) + (Cc/2) + 0

To check the second differential is whether less or greater than 0D2 TC/dQ2 = (2DCo)/Q2 ) > 0 (+ve)

Hence the value of Q will minimize the TC function

To obtain the value of Q: Equate the first derivative to 0,

(-DCo) /Q2 ) + (Cc/2) = 0

i.e. (-DCo) /Q2 ) = (Cc/2)

i.e. Q2 = (- 2DCo) / (-Cc)

i.e. Q = (2DCo/Cc) EOQ



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Inventory Control Systems

Continuous or Fixed Order-Quantity system

(Q- system / Perpetual Inventory control system)

Whenever the on-hand stock level touches the predetermined

point (ROP), a fresh order (Re-order)is placed

Periodic Fixed Order-Period System (P System)At fixed intervals of time (weekly/ monthly, etc.), a fresh order is

placed; quantity ordered is just sufficient to raise the stock level to

the maximum inventory level; the order quantity differs each time



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Q-System

Time

On-hand

inventory

L L L

Orderplaced

Orderplaced

Orderplaced

ROP

OH OHOH

Orderreceived

Orderreceived

Orderreceived

Orderreceived

T1 T2 T3



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On-handinventory

Time

Q1

Q2

Target stock level

P

Q3

Q4

PP

P-System



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Quantity Discount (Price-break) Model

Reduced prices are often available when larger quantities are

purchased

Trade-off is between reduced product cost and increasedholding cost

E.g.

Cost of Materials:

Qty. (Units) Unit Price (Rs)

> = 1000 15

1001 -1500 12.5

1501-2000 10

Decision on the Order quantity to be taken based on the total

cost comparisons between the EOQ cost and Quantity

Discount cost31CRG @ AIM - Production Management

2012


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Selective Inventory Control (SIC)

TechniquesSl.

No.

Analysis Basis Expansion

1 ABC Annual value of consumption Always Better Control

2 HML Unit price of the material High, Medium & Low price

3 VED Criticality of the Component Vital, Essential & Desirable

4 FSN Issue of Materials from stores Fast Moving, Slow Moving & Non-

Moving

5 SDE Availability Scarcely available, Difficult to get &

Easily available

6 SOS Seasonality of Items Seasonal & Off-Seasonal

7 GOLF Source of purchase Govt., Local & Foreign

8 MUSIC-

3D

Combined advantages of ABC,

VED & FSN analyses

Multi-Unit Selective Inventory

Control 3-Dimensional analysis



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Maintenance Management Upkeep of machinery, equipment, tools and other productive

facilities in order for the smooth production operations



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PLANNEDMAINTENANCE

PreventiveMaintenance

ScheduledMaintenance

Condition BasedMonitoring (CBM)

TotalProductive

Maintenance(TPM)

35CRG @ AIM - Production Management

2012


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Reliability

Reliability is the probability that a machine will

function accurately or properly for a specified time

Principle of RedundancyProvide backup components to increase reliability



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Bath Tub Curve

37CRG @ AIM Production Management

materials management & maintenance slides 109 to 145

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