IMT-23: Inventory Management

IMT - 23: INVENTORY CONTROL MANAGEMENT

PART - A

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Q1. Explain the following competitive strategies: (i) Cost leadership (ii) Differentiation (iii) Focus strategies.

Q2. Analyse how operational strategies can be translated into operational effectiveness.

Q3. 'The heart of inventory decisions lies in the identification of inventory costs and optimizing on them.' Comment.

Q4. Elaborate on some inventory classification models.

Q5. Forecast the production for the next 2 years when the production quantities in thousand tones for the last ten years are 150,165, 170, 155,170,185,210,225, 235,248

Analyse the implications of the results using the following methods:

i. Simple average

ii. Three year weighted moving average with weights of 1, 3 and 4 for the first year, second year and third year respectively considered for calculating averages

iii. Moving average (3 years and 5 years)

iv. Exponential smoothing (for smoothing constants, 0.2 , 0.5 and 0.8)

PART - B

Q1. A part used to repair machines has a normally distributed monthly demand with a mean of 65.0 and a standard deviation of 5.2. If the lead-time is so predictable that it can be considered a constant 0.25 month and the service level is 90 per cent:

a. What is the order point?

b. What is the safety stock level?

Q2. A company uses a fixed order period for ordering a forging that is purchased for Rs 180 per unit. The annual demand for the forging is 15,000 units. The ordering cost is Rs 800 per order. The annual carrying cost rate is 35 per cent of the acquisition cost. The expected demand during lead-time is 200 units and the upper inventory target is 700 units.

a. How often should the forging be ordered?

b. What is the annual total inventory cost that should be expected?

c. If the company is going to place an order now and the current inventory level is 248 units, what should be the order quantity?

Q3. What do you understand by the single-period inventory problem? Explain with examples. How can it be resolved?

Q4. What is meant by aggregate planning? What strategies does it employ to manage supply?

Q5. Explain scheduling and some techniques used for scheduling.

PART - C

Q1. Define the MRP I and MRP II systems. Trace their evolution and development and point out the differences between them.

Q2. What are distribution systems and how do they impact finished goods inventory?

Q3. What do you understand by Kanban? Examine the two different types of Kanban systems used in JIT systems.

Q4. What are the hurdles that pose a challenge to maintaining an effective service parts operation?

Q5. Explain variety reduction, parts standardization and simplification.

CASE STUDY - 1

GUPTA AND SONS LTD

Gupta and Sons Ltd is a family-owned and managed company started in 1960 by Vinay Gupta. The company has since enjoyed a slow, steady growth. The company employs just over 200 people. All expansions are financed entirely out of earnings. As the company grew, its operating procedures were periodically re-examined and modified to cope with the complex problems accompanying growth. The company develops, manufactures and sells different types of valves used in the chemical industry.

The company's product line contains about forty types of valves, ranging in size from 200 grams to large valves weighing up to fifteen kgs. The company lists about 400 products in its product literature. This is because some of the valves were made in different models and sizes. About half the products are standard products whose design has not changed greatly in the last ten years.

The other half, is devoted to special products. These are subject to considerable technological change. A few involved special features for different customers. Sometimes, special alloys had to be used to resist the corrosive action of certain chemicals. The company's position in the industry depends on its ability to keep ahead of its competitors in design, quality of product, customer service and price. Design and quality have been the most important parameters.

The company has never had a formal production planning and inventory control activity. Mr. Anil Agarwal, the production manager, determined the exact quantity to manufacture in consultation with Mr. Vinay Gupta. The minimum stock balance and the standard manufacturing time was determined by Mr. Agarwal in consultation with Mr. Vinay Gupta, taking into consideration the past sales of the item, the time required for a production run, manufacturing economies, potential obsolescence, storage space available and the financial resources of the company. In the last year, the minimum stock balance and the manufacturing quantity on most items had been revised upward because of a substantial increase in volume, delivery delays, and more frequent manufacturing runs.

A typical manufacturing run requires about nine to twelve weeks, most of which is consumed in obtaining castings. Actual processing in the plant requires two to four weeks. The company felt that about three to four runs per year was about right for each item.

In determining the exact quantity to manufacture, Mr. Agarwal was guided by the previously set quantities but consulted informally with the engineer, development, sales, and finance departments before each run. He then made out a make-and-buy sheet showing for the item in question the various parts required, the shop print numbers, the materials from which the parts were made, the quantity of each part required per completed unit, and the estimated completion date. The make-and-buy sheet was forwarded to the assembly foreman, who checked off for each part the quantity of that part which had been accumulated from overruns on previous orders.

It was the responsibility of the supply manager, Mr. Ram Rastogi, to obtain the castings, materials, and parts indicated. He had to follow the make-and-buy sheet. Mr. Rastogi could not alter the quantities shown on the make-and-buy sheet without discussion with Mr. Agrawal.

As per the practice, castings, bar stock, plates, odd sizes of expensive alloys, and similar materials were purchased in the exact quantity required for the manufacturing order. Standard nuts, bolts, studs, pipe fittings and similar items were usually bought in standard commercial lot quantities, but even here the quantities did not greatly exceed immediate requirements, and frequently even these items were bought by the piece. Molded plastics and special fittings or stampings were sometimes bought in excess of immediate needs, especially when costs of small lot procurement were prohibitive.

When materials began to come in, they were checked off the make-and-buy sheet and taken to the store-room, to the production floor, or, if they were finished parts, to assembly. There was no formal scheduling in the machine shop. The machine shop foreman was free to work on any manufacturing orders on which materials had been received. It was up to him to keep his staff and machines busy and to meet the estimated completion dates. As parts were completed, they moved on to assembly where they were placed in the tote box with other parts accumulated against that order. "When all parts were completed, assembly could take place. Finished units were placed in stock in the shipping room or were shipped out immediately against orders.

In the recent past, the company had seen a decline in profits. Mr. Vinay Gupta's elder son Ashish, had joined the business as a management trainee around three years back. After a year, he was positioned as the Marketing Director of the company. He had just completed one year in his new job when he realized that the company seemed to revolve around Mr. Agarwal. As Mr Agarwal was very conservative in his commitments, he usually allowed himself more time than was necessary for ordering, machining, and assembly while setting estimated completion dates. As a result, Ashish Gupta found that sales had often been lost.

Also, completion of the lot was not posted to the sales and production record until the entire lot was finished. As some units were often assembled well in advance of the completion of the entire lot, these were not recorded as being available. This created some problems. The sales and production record frequently indicated the earliest delivery as some time in the future when, in fact, completed units were in storage on the shipping room shelves. In this way, sales had been lost to competitors who quoted earlier deliveries.

Two of the officials had also spoken to Ashish Gupta and expressed concern over the amount of money spent on transportation. Transportation costs were estimated to be 12 percent of the cost of purchased material. The company also had no formal inventory control system. No record was kept of raw materials, purchased parts, or manufactured parts on hand. An informal tabulation of finished goods showed the minimum stock balance and the standard manufacturing quantity. The sales and production record, maintained for each item, showed the balance on hand, the amount currently being manufactured, orders received, customers' names, and dates of shipments made.

Mr. Ashish Gupta also found that jobs were frequently sold before completion and a second lot started before the first lot was finished. Therefore, about fifty to sixty shop orders were initiated each month. As customer orders were received, they were posted to the sales and production record. When such orders reduced the balance on hand and in process to the predetermined minimum, a notice of depletions was prepared, showing the balance on hand and the standard manufacturing quantity. This notice was sent to Mr. Agarwal.

No records were kept on such accumulated parts. The parts were stored in bins in the assembly department, and those counted out against the make-and-buy sheet were separated in a tote box against the time when that order would be assembled.

The make-and-buy sheet was returned to Mr. Agarwal, who edited it to determine whether certain parts should be made or ordered in larger quantity than required for that particular order. Where parts were interchangeable, he often consolidated them with other orders. Mr. Agarwal was familiar with the manufacturing process and set-ups involved, knew the price breaks on materials, and had a general knowledge of probable future demand. Before forwarding the make-and-buy sheet to Mr. Rastogi, he entered an estimated completion date, which in turn was posted to the sales and production record.

The traffic function was controlled by Mr. Agarwal. Three young employees who were more or less under the control of Mr. Agarwal performed the receiving and warehousing functions. Supply also reported to Mr. Agarwal. Normally, when an incoming shipment arrived, the foreman would oversee its receipt and report to Mr. Agarwal.

Mr. Ashish Gupta spoke to his father and recommended the advisability of installing a more formal system for controlling its cost of materials. Ashish Gupta felt that the company should establish a more systematic control over raw material, manufactured and finished parts, and finished goods inventories. He pointed to the orders lost, the waste of buying and producing in small quantities, delays in production and assembly occasioned by absence of materials and parts, and losses by misplacement, breakage, and pilferage. He also felt that Gupta and Sons Ltd might be able to make significant savings through a systematic control of surplus and salvage.

Mr. Ashish Gupta pointed that no survey had been made to evaluate potential savings in these areas since no records were kept. Inventory losses could not be measured. Pilferage was probably negligible, because the only items having real intrinsic value (thermometers and similar components) were kept in a locked cabinet by the assembly foreman.

However, Mr. Agarwal was opposed to changing the inventory control procedure. He also resisted the introduction of changes in the areas of production planning and control, receiving, warehousing, and traffic. His argument was based on the risks of obsolescence in any inventory accumulation, and, more importantly, the amount of funds that might be tied up in inventory and the space that would be necessary if substantial stocks of materials, parts, or finished assemblies were to be built up.

He believed that if the company wanted to improve margins, it should look at other uses of company buildings, buy new equipment, and invest in research and development. These, he felt, would yield greater returns.

Mr. Vinay Gupta brought the matter to the attention of senior management. He circulated the following questions for which answers were to be ready for the Board to consider the matter and take the necessary decisions:

1. What specific action should the company take in the area of inventory control? Support your proposal with an analysis of its strengths and weaknesses.

2. What is your reaction to the argument of those who oppose tighter controls?

3. How does the inventory control problem change as the company's overall volume of business increases? Please provide answers to the questions above. Do you think that Gupta and Sons Ltd could benefit from the establishment of a supply chain management department? If so, what functions should it include?

CASE STUDY - 2

Vikas Electronics is a small firm located in Noida. The major product is a line of automobile electrical system analyzers. Auto repair shops who do tune-up work use these analyzers to identify and diagnose problems in a car's electrical system. Although the market is highly competitive, Vikas's products compete well and the firm is reasonably profitable.

The firm's production operation is ideally suited for management with an MRP-type planning and control system. Consequently, three years ago, such a system was installed. Initially, it did not work well, because it was not properly coordinated with the supply operation, and the planning data used in the system was not reliable. In time, however, the bugs were worked out, the system was refined, and it is now working well.

One of the organizational changes Vikas implemented was the creation of a department of supply chain management that includes supply, production control, traffic, inventory management and warehouse operations. This arrangement seemed to facilitate effective operation of the MRP system.

More recently, the firm adopted the use of the supply manager-production planner concept. That is, a supply manager's job and a production planner's job have been combined into a single job. The number of materials handled by each supply manager-production planner has been reduced, but the scope of the task has become more extensive and more integrated in nature.

For a given group of materials, a single individual prepares the production schedule and works directly with suppliers to make it function correctly.

Like most MRP systems, the one used by Vikas Electronics is computer operated. However, when a new supply manager-production planner is hired, he or she is 'broken in' to the planning portion of the job by developing and managing the plan for one or two materials manually. The purpose of this approach is to teach the newcomer how the operating routine works, so he or she can understand clearly what the computer does when it runs the MRP planning and operating system.

Vikas Electronics recently hired Gaurav Misra in the firm's supply chain management department as a junior supply manager-production planner. One of the materials he was assigned to handle was the metal housing for the Model 2A analyzer. The housing is formed by stamping and fabricating operations, and is single-sourced with a large metalworking shop in a Mumbai suburb.

During Gaurav's second day on the job, his boss gave him the Model 2A housing requirements projection for the next ten weeks and asked him to manually manage the item. The requirements and associated data are shown in the table below.

Order quantity = 140	Weeks --> Firm reqts.											Tentative
Lead time = 4 weeks	1	2	3	4	5	6	7	8	9		10	11 12
Safety stock = 80
Requirements	40	40	50	40	40	50	40	40	60	50		50 50
Receipts
OH-eid of week 130	140
Planned order releases

Gaurav has to:

1. Manually complete the ordering/operations plan for the Model 2A housing and simultaneously, construct a table showing when he would expect order points to be reached during the first eight weeks.

2. List and discuss briefly the types of operating problems he might encounter that could require re-planning and rescheduling of work.

You are required to help Gaurav in this assignment.

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