Material Management: Inventory Control & QC Techniques

1. SNIST (JNTUH) – B.Tech
UNIT III
MATERIALS MANAGEMENT
Dr. S. VIJAYABHASKAR
PROFESSOR IN MECHANICAL ENGINEERING
SREENIDHI INST. OF SCIENCE AND TECHNOLOGY,
HYDERABAD

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

3. UNIT – III
MATERIALS MANAGEMENT
 EOQ
CARRYING
COST
PURCHASING
COST

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

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

6. The fundamental objectives of the Materials
Management, often called the famous 5 Rs (TQQPS)
of Materials Management, are
Providing theRequiredMaterial
at theRightTime
inRightQuantity
ofRightQuality
atRightPrice
fromtheRightSource

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

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

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

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

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

12. BENEFITS OF INVENTORY CONTROL
 Ensures an adequate supply of materials
 Minimizes inventory costs
 Facilitates purchasing economies
 Eliminates duplication in ordering
 Better utilization of available stocks
 Provides a check against the loss of materials
 Facilitates cost accounting activities
 Enables management in cost comparison
 Locates & disposes inactive & obsolete store items
 Consistent & reliable basis for financial statements

13. INVENTORY CONTROL
TECAHNIQUES/MODE
LS

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

15. ABC ANALYSIS
(ABC = Always Better Control)
 This is based on cost criteria.
 It helps to exercise selective control when confronted
with large number of items
 It Rationalizes the number of orders, number of items &
reduce the inventory.
 About 10 % of materials Consume
70 % of resources
 About 20 % of materials consume
20 % of resources
 About 70 % of materials consume 10 % of resources

16. PROCEDURE FOR ABC ANALYSIS
 List all items of inventory
 Determine the annual volume of usage and money value of
each item
 Multiply each item’s annual volume by its price
 Compute each item’s percentage of the total inventory
in terms of annual usage in terms of Cost
 Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
 Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
 The next 70% of all items with the lowest price
percentages are “C” items.

17. A ITEMS
SMALL IN NUMBER, BUT CONSUME LARGE AMOUNT OF
RESOURCES
Must have:
• Tight control of Inventory
• Rigid estimate of requirements
• Strict and closer watch of items
• Low safety stock level
• Supervised and managed by top management

18. B ITEMS
INTERMEDIATE/MODERATE IN NUMBER AND CONSUME
MODERATE AMOUNT OF RESOURCES
Intermediate
‡
Must have:
 Moderate control
 Purchase based on rigid requirements
 Reasonably strict watch & control
 Moderate safety stocks
 Managed by middle level management

19. C items
Larger in number, but consume lesser
amount of resources
Must have:
•Ordinary control measures
•Purchase based on usage estimates
•High safety stocks
ABC analysis does not stress on items those are less
costly but may be vital

20. 20000050020
19950050019
19900050018
19850050017
19800050016
19750050015
19700050014
19650050013
196000150012
194500150011
193000175010
19125027509
18850040008
18450045007
18000050006
17500075005
16750075004
160000200003
140000500002
90000900001
CUMMULATIVECUMMULATIVE
COSTCOST [Rs.]
ANNUAL COSTANNUAL COST
[Rs.]
ITEMITEM COST %COST %ITEM %ITEM %
70 %70 %
20 %20 %
10 %10 %
10 %10 %
20 %20 %
70 %70 %
ABC
A
N
A
L
Y
S
I
S
WORK
SHEET

21. ABC CLASSIFICATION
Fig 1
Fig 2

22. ADVANTAGES OF ABC ANALYSIS
 Helps to exercise selective control
 Gives rewarding results quickly
 Helps to point out obsolete stocks easily.
 In case of “A” items careful attention can be paid at
every step such as estimate of requirements,
purchase, safety stock, receipts, inspections, issues,
etc. & close control is maintained.
 In case of “C” items, recording & follow up, etc.
may be dispensed with or combined.
 Helps better planning of inventory control
 Provides sound basis for allocation of funds &
human resources.

23. DISADVANTAGES OF ABC ANALYSIS
 Proper standardization & codification of
inventory items needed.
 Considers only money value of items &
neglects the importance of items for the
production process or assembly or functioning.
 Periodic review becomes difficult if only ABC
analysis is recalled.
 When other important factors make it obligatory
to concentrate on “C” items more, the purpose
of ABC analysis is defeated.

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

25.  EOQ or Fixed Order Quantity system is the technique of
ordering materials whenever stock reaches the reorder
point.
 Economic order quality deals when the cost of
procurement and handling of inventory are at
optimum level and total cost is minimum.
 In this technique, the order quantity is larger than a
single period requirement so that ordering costs &
holding costs balance out.

26. EOQ
CARRYING
COST
PURCHASING
COST
ECONOMIC ORDER
QUANTITY(EOQ)

28.  Demand for the product is constant
 Lead time is constant
 Price per unit is constant
 Inventory carrying cost is based on average
inventory
 Ordering costs are constant per order
 All demands for the product will be satisfied (no
back orders)

29.  Erratic usages
 Faulty basic information
 Costly calculations
 No formula is substitute for commonsense
 EOQ ordering must be tempered with judgment

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

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

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

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

34. JUST IN TIME (JIT)
 JIT is a manufacturing system whose goal is to optimize
processes and procedure by continuously pursuing waste
reduction
 It is both a philosophy and a set of methods for manufacturing.
 Even though it has no single, agreed-upon definition, JIT
emphasizes waste reduction, total quality control, and devotion
to the customer.
 The increase efficiency and decrease waste can be achieved by
receiving goods only as they are needed in the
production process, thereby reducing inventory costs.
 This method requires that producers are able to accurately
forecast demand.

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

37. JIT – 7 Wastages
 The JIT inventor: Toyota Motor Company identified seven
wastes in Operations as being the targets of continuous
improvement in production process. By reducing these
wastes, an improvement in productivity can be achieved.
 Waste of Overproduction
 Waste of Waiting
 Waste of Transportation
 Waste of Processing itself
 Waste of Inventory Stocks
 Waste of Motion/Movement
 Waste of Making Defective Products

38. Waste in Operations

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

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

41. Waste in Operations (cont.)

42. Waste in Operations (cont.)

44. 7 Wastes

45. Implementation of JIT – Three Elements

46. JIT Implementation Requirements:
Design Flow Process
Link operations
Balance workstation capacities
Redesign layout for optimum flow
Emphasize preventive maintenance
Reduce lot sizes
Reduce setup/changeover time

47. JIT Implementation Requirements: Total
Quality Control
Worker responsibility
SQC in place
Enforce compliance
Fail-safe methods (poka-yoke)

48. JIT Implementation Requirements: Work with
Vendors
Reduce lead times
Frequent deliveries
Project usage requirements
Clear Quality expectations

49. JIT Implementation Requirements: Reduce
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More Inventory
Look for other areas to reduced materials
Minimize Stores
Minimize Transit
Carousels
Conveyors

50. JIT Implementation Requirements: Improve
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 Product Design
 Standard produce configuration
 Standardize and reduce number of parts
 Align Process design with product design
 Quality expectations

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

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

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

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

55. WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?
 A set of approaches used to efficiently integrate
 Suppliers
 Manufacturers
 Warehouses
 Distribution centers
 So that the product is produced and distributed
 In the right quantities
 To the right locations
 And at the right time
 System-wide costs are minimized and
 Service level requirements are satisfied 55
Plan Source Make Deliver Buy

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

57. Quality control techniques
1. Inspection
2. ISO standard
3. Six sigma

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

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

61. SIX SIGMA

62. METHODOLOGIES
DMAIC

63. METHODOLOGIE
S
DMADV

64. THANK YOU