Operations Session 14 - Review Notes

MET ICSs PGDM 2013-2015 batch Session # 14
Operations Management

Document1SessB14LotSizingNOrderFinal.docxPage 1 of 20 (KV,LB,ST /PM,PG,SK,NR)

(Shashank Tilak)
Session no. 14

Dated: 16
th
September 2013

Topic: Lot Size Controlling and Make of Buy
decision

Notes critiqued by:
Kapil Jadhav- 07
Bhumi Jakharia- 21
Bijon Kanabar- 24
Gaurav Sahasrabudhe- 33
Jophy Thomas- 38
Manish Makhija- 54
Kinjal Shah- 56

Notes preapred by:
Ashwin Widge 05
Afreen Jawed 11
Nikita Singh 19
Amar Puri 35
Priyanka Chhabria 46
Sayli Chaudhari 53


Lot Size Controlling and Buying Decision
The two main areas which need to be look after before considering lot size
controlling and buying decision is managing inventory and how to plan and place
and order.
Managing Inventory:
Managing inventory includes the balance of demand and supply. To meet up the
customers demand the demand and the supply forces both have to be balanced.
Demand is generally customer centric and supply is planning and procurement of
the stock required meeting up the customer demand. For managing demand
various things like time of order, quantity demanded etc have to be taken into
consideration. For managing inventory there has to be proper warehousing
facility and supplier and plant or wareshouse have to be connected in best
possible way whichever is feasible and cost effective.
Planning and Placing an Order:
While planning and placing order how many and how much quantity to order is to
be decided. When and what time to place order and even release the order an d
even at what time the raw materials are to be received and procured in stock. The
location, site, vendor from which the material should be received has to be taken
into consideration too.

Make or buy decision
The act of choosing Strategic Act of Deciding whether a part/service should be
procured or manufactured internally or purchased of from an outside supplier. One You
has have to attach weights on each of the parameter and take a decision based on
current situation and decide whether to make it in-house or outsource it. The major
factors to be considered are:-
1- Cost- It should make economic sense to buy i.e. it has to be cheap and
affordable. . It should be cheaper to buy. Any cost saving achieved from buying
or making must be weighed against the preceding factors. Economic analysis
of make or buy decision is based on evaluation of overall economic and
strategic factors in a structured and weighted manner.
2- Timing of need-Timing of need is also an important factor. It includes
seasonality of goods. Suppose we need to manufacture some goods and if it
would take long time E.g. 5 days, it would be rational to buy it from outside,
thus this would save time. Timing is also related to overall period for which the
need is expected. If it is a short term or very infrequent need, it may not be
worth efforts to set up a facility to manufacture in house but rather outsource
it..
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3- Capacity and Availability- This is another very important factor which we
should consider while taking a decision whether to produce internally or buy
from outside. If firm has available capacity in equipments, necessary skills and
time, it makes sense to produce an item so that the available capacity in
equipments and skilled labour can be made use of. Here we may have the
capacity to produce the goods but we have booked it to produce some other
goods i.e. it is utilised for some other purpose. So despite having the capability
it is wise to take the decision of buying from outside.
4- Proprietary/ specialized/patented-
Patented-Patented products are protected so that they it cant be imitated.
Specialize-If the needed expertise is lacking in the firm, buying might be a better
alternative.
In another sense technology and methods used for manufacturing may be
proprietary and hence not available for our use.

5- Quality and Skills Consideration-Quality and skills are of strategic
Importance. Outside suppliers who specialize can usually offer high quality
products than what the firm can produce. But unique quality requirement or the
desire to closely monitor the quality may cause a firm to decide to make

When we have the required skills we can make the product in the way it is
exactly required. Sometimes companies require particular skills to develop a
particular product, and in absence of the required skill it becomes essential for
the company to develop these skills.

E .g.- Tata Motors will outsource engine due to availability of skills with their engine
production JV with Cummins Ltd, and on the other hand it will never outsource gear
box as it possesses the required skills.
6-Volume, Speed of Need:-The volume may be too high or too small for few
organizations to make it. The speed or rate at which production takes place and it
what quantity or volume one can produce it is of great importance and benefit. For
e.g: China gets or receives orders from major manufactures of the world because of
the huge human resource and the flexibility in the operations over there. The rate,
time and speed at which they produce is the main reason they dominate the
manufacturing processes worldwide. someone else to make it.
Apart from the above important considerations, the other non-economic
considerations could be:-
1. Reliability of outside suppliers.
2. Delivery schedule to be met

3. Control of design secrets.
4. Employee preference for particular nature of work
5. Availability of suppliers (for outsourcing)
6. Reliability of outside suppliers

Lot Sizing Models

In Lot sizing model there are different principles that are applied
Lot sizing is done mainly for optimizing the cost. As we can see in the graph, direct cost always
remain constant, Storage cost shows linear variation. Ordering Cost , Carrying Cost, Inventory
Cost, Setup cost are the different cost which are to be taken into consideration for calculation
of optimal cost. During the delivery of goods there are many transportation issues. Proper
planning plays a very important role for completion of order. One should be aware about the
type of order he is taking from the customer depending upon the capacity. Take an example
one time order of 30,000 units of a product is important or everyday order of 1000 product is
suitable. If there is a possibility to group 2-3 orders group together and& do processing.
Grouping leads to minimization of cost as well as effective utilisations of resource. In the above
graph where setup cost and storage cuts each other at the point, that point indicates optimal
cost at which the output is being produce and most of the company try to achieve that point.

Optimisation of Cost-The MRP system generates planned order releases, which
trigger purchase orders for outside suppliers or production orders for in-house
production department as certain cost such as the setup cost or ordering cost and
holding cost or inventory carrying cost are associated with each other, it is necessary to
consider the trade offtradeoff between these 2 types of cost and take decision regarding
how much to order that is batch size or lot size.
Transportation and transit/transaction issues also lead to optimization of cost.
Combination of Run time for each Lot- It refers to the time for which each
machine is working. It includes the maximum time required for production. It also
takes into consideration idle time.

Records to Track and Manage- It refers to additional efforts and cost required to track
and manage different items
Balancing Material availability and Grouping of orders- It includes managing
relative products.
Single/Multiple Item lots- whether its a single item produced in a lot or more than
one item in a lot.

Principles in Managing Inventory
(Source:http://www.purchasing-procurement-center.com/principles-of-inventory-
management.html)
There are five key principles of inventory management:
1. demand forecasting,
2. warehouse flow,
3. inventory turns/stock rotation,
4. cycle counting and
5. process auditing.
Focusing on these five fundamentals can yield significant bottom-line savings.
1. Demand Forecasting
Depending on the industry, inventory ranks in the top five business costs. Accurate
demand forecasting has the highest potential savings for any of the principles of
inventory management. Both over supply and under supply of inventory can have
critical business costs. Whether it is end-item stocking or raw component sourcing, the
more accurate the forecast can be.
Establishing appropriate max-min management at the unique inventory line level, based
on lead times and safety stock level help ensure that you have what you needs when
you need it. This also avoids costly overstocks. Idle inventory increases incremental
costs due to handling and lost storage space for fast-movers. Demand are of 2 types
Independent as well as dependent.
Example: Milk is dependent as well as independent. If an individual purchases milk for
drinking or tea making it is independent, where as milk can be use for making paneer ,
butter , milk cakes etc, now it is dependent. It depends upon the usage.
2. Warehouse Flow
The old concept of warehouses being dirty and unorganized is out dated and costly.
Lean manufacturing concepts, including 5S have found a place in warehousing. Sorting,
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setting order, systemic cleaning, standardizing, and sustaining the discipline ensure that
no dollars are lost to poor processes.
The principles of inventory management are not any different from other industrial
processes. Disorganization costs money. Each process, from housekeeping to
inventory transactions needs a formal, standardized process to ensure consistently
outstanding results.
3. Inventory Turns/Stock Rotation
In certain industries, such as pharmaceuticals, foodstuffs and even in chemical
warehousing, managing inventory down to lot numbers can be critical to minimizing
business costs. Inventory turns is one of the key metrics used in evaluating how
effective your execution is of the principles of inventory management.
Defining the success level for stock rotation is critical to analyzing your demand
forecasting and warehouse flow.
4. Cycle Counting
One of the key methods of maintaining accurate inventory is cycle counting. This helps
measures the success of your existing processes and maintain accountability of
potential error sources. There are financial implications to cycle counting. Some
industries require periodic 100% counts. These are done through perpetual inventory
count maintenance or though full-building counts.
5. Process Auditing
Proactive error source identification starts with process audits. One of the cornerstone
principles of inventory management is to audit early and often. Process audits should
occur at each transactional step, from receiving to shipping and all inventory
transactions in between.
By careful attention to each of these critical core principles, your business can increase
Demand: An economic principle that describes a consumer's desire and willingness to
pay a price for a specific good or service. Holding all other factors constant, the price of
a good or service increases as its demand increases and vice versa.
Basic Identification of demand-
There are two types of Demand:-
-Independent demand-
Meaning- demand for a material which that is independent of the demands for other
materials. For example-demand for end products are independent of demand for parts,
raw materials or components as their demand are determined by customers outside the
organisation.
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In case of independent demand we can influence the demand to some extent but we
cant wholly control it. It is required for spare part products or end items E.g.- Cap of a
bottle. The cap of a bottle can fit in any size of bottle so it will have an independent
demand. E.g. - Tyres of Car, when tyres are sold as a spare part, it is considered to be
an independent demand.
Eg .Supplies made to OEMS is dependant demand.
Eg .supplies made to general market is independent demand.

-Dependent Demand-
Meaning- Demand for a raw material, part or a component, that is dependent on the
demand for the end product in which these materials are used.
Dependent demand is related to at least one of independent item. Once you fix
independent demand you can fix dependent demand. The components parts are
generally dependent demand. E.g.- Tyre of a bike depends on the number of bike sold.

Nature Of Demand:-
Uniform (constant) units/period- The demand which is It can be at a steady rate of
so many units per month or week or some period, with minor variation is called uniform
demand..
Lumpy Demand: - If the demand for the materials varies greatly from time period to
time period (say week to week), the demand is said to be lumpy demand. It will also
include periods when demand is zero. Hence it is not really possible to expect a uniform
demand for that product.
When there is a sudden hike in demand and we order through MRP.
Eg. demand for mangoes, demand for gold increases during festive season.
Variation in demand-Variation in demand can be taken care by forecasting and
different other techniques. Forecasting refers to the activity of estimating the quantity of
a product or service that consumers will purchase

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Basic details for sample;-
Ordering cost (Cp)
It is total of all expenses incurred in placing an order. It is the cost incurred in preparing
and processing purchase orders as well as in receiving and inspecting the purchased
items. Examples of ordering costs include salaries of purchasing clerks, telephone, and
stationery.
Inventory carrying cost. (Ch)
Inventory Carryingcarrying cost refers to the total cost of holding inventory. This
includes warehousing costs such as rent, utilities and salaries, financial costs such as
opportunity cost, and inventory costs related to perishability, shrinkage and insurance.
When there are no transaction costs for shipment, carrying costs are minimized when no
excess inventory is held at all, as in a Just In Time production system
Average requirements- It is demand for the goods. This requirement may be
calculated on monthly basis/weekly basis etc.
Net result of all the factors related to ordering and holding inventory is recognition of a
point / quantity of product which will give right balance between these two costs. This
quantity is called Economic Ordering Quantity (EOQ) The total cost of ordering and
holding inventory is expected to be minimum at this quantity. This is a useful concept and
model that helps to understand overall balancing of costs and identify how one should
proceed with optimization. For most purposes this is an ideal scenario. There are
number of assumptions and expectations at work here. These are mainly related to
steady rate of consumption, ideal execution by way of receiving full ordered quantity
exactly when the inventory gets over, steady levels of prices regardless of quantities
ordered or payment terms etc. For these reasons, it will be good to look at this model
only for understanding different forces at work in defining total costs for the procurement
and making inventory available.
It is important to realize that EOQ is only one and a starting point of these studies.
There are several other options and methods that can be used to optimize procurement
costs. Some of these are discussed below.

Methods of ordering
When you are involved in the production process you tend to buy the goods that you
will be using in the process. The goods that you will be using are large in quantity and
are expensive in nature, so in order to avoid any wastage and to make a good usage of
the goods it becomes necessary that proper planning is been made and the order of the
quantity of the required goods are made in the economic manner. So in order to make an

effective ordering decision it is very important to decide on the frequency of placing an
order and the quantity of order so as to keep the total cost low.
For all the examples below there are a standard set of assumptions such as
Ordering cost is Rs 300 per order
Inventory carrying cost is Rs 2 per piece per week
EOQ for the product is 166 pieces per order
Average demand for the 12 week period and the statistics of demand is 92.1 per
week
1. EOQ Method - STANDARD METHOD
The economic order quantity (EOQ) is the order quantity that minimizes total holding
and ordering cost for the year.
Ordering Cost (Cp) = 6 X 300 = 1800
Carrying Cost (Ch) = (Total Start inventory + Total End Inventory) = 3065
Total Cost =( Cp + Ch) = 1800 + 3065 = 4865
This method relies on placing each order for EOQ. In this method the order is higher
and it is placed just in time before the stock is out. For each of the 6 orders here total
ordering cost will be Rs 300 X 6 = Rs 1800. For each week it is necessary to calculate
average inventory (= sum of starting and end inventory / 2). Then multiplying this
average inventory for each week by Rs 2 will give inventory carrying costs. Here the
resulting total cost can be calculated by adding the ordering cost and carrying cost. The
carrying cost in this method is comparatively higher because your inventory is higher. As
a result total cost of procurement for this set works out to Rs 4865/-.
2. Periodic Order Quantity
Week no 1 2 3 4 5 6 7 8 9 10 11 12
Requirements 10 10 15 20 70 180 250 270 230 40 0 10
Order qty 20 - 35 - 250 - 520 - 270 - - 10
Start
inventory 20 10 35 20 250 180 520 270 270 40 0 10
end inventory 10 0 20 0 180 0 270 0 40 0 0 0

Week no. 1 2 3 4 5 6 7 8 9 10 11 12
Reqiuire
ments
10 10 15 20 70 180 250 270 230 40 0 10
Order qty 166 166 223 270 230 166
Start
inventory
166 156 146 131 111 207 250 270 230 166 126 126
End
inventory
156 146 131 111 41 27 0 0 0 126 126 116

Total Cost =( Cp + Ch) = 1800 + 2145 = 3945
In this method you place an order periodically by calculating the time between orders by
EOQ. This can be calculated by dividing the EOQ by total demand. This will give you the
exact order quantity required. Since total 6 orders are required to meet the demand, here the
decision is to place orders in alternate weeks. Each order will meet requirement for next two
weeks. As a result overall ordering pattern will be as shown above. With same number of
orders, ordering costs will remain same. But overall the average inventory comes down
drastically. As a result, inventory carrying cost will come down to Rs 2145/- and total cost of
procurement will be Rs 3945/-. Here the carrying cost is comparatively lesser than the
standard method because the order quantity is reduced and the frequency of order is
increased.

3. Part Periodic Balancing Method

Week no 1 2 3 4 5 6 7 8 9 10 11 12
Requirmnts 10 10 15 20 70 180 250 270 230 40 0 10
Order qty 55 - - - 70 180 250 270 270 - - 10
Start
inventory 55 45 35 20 70 180 250 270 270 40 0 10
end
inventory 45 35 20 0 0 0 0 0 40 0 0 0

Total Cost =( Cp + Ch) = 2100 + 1385 = 3485

This method is a refinement of periodic order quantity mentioned above. It relies mainly on
calculating optimal cost by trial and error. It will try to increase order quantity to include one
more weeks consumption. As a result each order quantity will increase and unit cost for
each order will decrease. Against this, inventory carrying cost will increase. The calculation
is done by increasing order quantities by one week in each step and calculation of total cost
for that order. So long as the increased inventory carrying cost is less than Rs 300 or cost of
one more order, this technique will result in lesser total cost. Resulting ordering and
inventory holding pattern is shown in table above. In this method you order the quantity by
clubbing the requirements of few weeks and you identify the combination that gives
minimum cost. When the Requirement is of higher quantity the order is made on weekly
basis, whereas where the required quantity is smaller, the order is combined for few weeks.
Here the resulting cost is less because the carrying cost is the least, as whatever is ordered
is consumed and not much quantity is kept as inventory. Although cost of ordering one more
time is increased by one order (Rs 300/-), inventory carrying cost is decreased even more.
Hence total cost of procurement comes down to Rs 3485.


Wagner Whitin Algorithm-

Week no 1 2 3 4 5 6 7 8 9 10 11 12
Requirm
nts 10 10 15 20 70 180 250 270 230 40 0 10
Order qty 55 - - - 70 180 250 270 280 - - -
Start
inventory 55 45 35 20 70 180 250 270 280 50 10 10
end
inventory 45 35 20 0 0 0 0 0 50 10 10 0

Total Cost =( Cp + Ch) = 1800 + 1445 = 3245
IN this method, a dynamic programming technique is used to further optimize total
costs. This method gives order and inventory holding pattern shown above. You try to
maintain least amount of stock. In this method we follow dynamic
programingprogramming method in which we identify the combination that will help us in
giving the minimum cost. As compared to Part Period balancing, one lesser order is
required which reduces ordering cost. At the same time an additional inventory is carried
from weeks 9 through 12. Hence total cost of operation is Rs 3245/-.
All these methods show that it is possible to further optimize costs of procurement by
using different ordering techniques. Total cost of procurement will depend not only on
costs of ordering and carrying inventory but also on demand pattern and quantum of
each demand element.

Factors that will influence the ordering decision
1. Production of goods is ordered based on the past trends. Like for instance during a
year the demand for the goods produced might be more but for the next year the demand
for the same goods might be less. So in such a scenario if the manufacturer orders more
goods expecting the same level of revenue the next year, then the organization will
definitely face loss.
2. Cost of the products that are needed in the production process.
3. The variation in ordering cost; based on the season and the need the cost of the
product will vary. So it is up to the manufacturer to decide on the best time to invest in
buying the needed goods.
4. Availability of proper storage space for the easily perishable and excess goods
5. The demand and nature of the product

7. Availability of the needed goods throughout the year
9. The quantity of goods that is needed to be kept as backup, so that the production
process is not withheld due to lack of resources.
Further considerations:-
Major demand Consideration
Single level considerations-There are 2 types of single level
considerations:-
1-Independent demand-
2-Dependent demand-
Multi Level Demand-At multiple level demand we will need components.
Here we require same material.
Ability to handle uncertainty is Key- Here we need extra support to
handle these uncertainty which is going to be there. We need to have an
idea about how much the uncertainty could be.
How can you estimate the uncertainty?
- Have an idea as to what can go wrong, how much can go wrong and be ready to
meet contingency.
Reasons for uncertainty
-Stability of operations details-
-Customer order quantity and dates may change and as a result both quantity
and demand patterns will also alter.
-Accuracy and availability of inventory is essential to ensure that all material
available in inventory is applied for active usage
-Ability to control production related to Dates and Quantity stability. Without such
stability

ORDER PROCESS TIMING
The expected period of time between the date an order is placed and when it is
manufactured/produced or shipped.
Timing is set on the basis of quantity
Safety Stock- The calculation of safety stock includes finding the probability and
combination of components.
Re order point- quantity of stock at which it will be necessary to place a new order. This
balance quantity should cover demand during lead time- including cover for Uncertainty
/Variation in Requirements.
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Order Timing decision

When after ROP (re order point) the consumption is slower so there is not much of a
problem but if the consumption goes faster than usual there can be a problem, we need
to stop the production. Or you may change your ROP but in case the supplier also cant
give you early and delays then there is a Stock out situation. If stock is consumed
slower and materials are ordered before the stock is exhausted then there will be an
problem of inventory pile. If consumption faster and order placed after exhausting stock
then there can be shortage for a few days if materials dont arrive on time.

APPLICATION OF SAFETY STOCK
SERVICE LEVEL-
Service level is a tool to measure customer service, denoted by (SL) and ( 0(0 SL 1) .
). Service level can be measured by
SL = No. of units delivered No. Of units demanded expressed a fraction or
percentage it essentially indicates a probability that available stocks will be sufficient
to meet most normal requirements.
Eg. If units demanded during a given period is 100 and the firm delivers 98 units, so
Consumption Faster
Consumption
Slower
Consumption
Order
Coming
In
Shortage during placing order &
deliveries

SL= 98100 = 98%
Maintaining Service level-
The goal of maintaining a service level is to maintain and improve on service quality
through a constant cycle of agreeing, monitoring, reporting and improving the current
levels of service. It is focused on maintaining the service and the quality acceptable by
the customer all the time and ensures that there is no stock out situation. For this safety
stock is maintained i.e the amount of inventory kept to meet the service target given the
forecast errors due to variation in customer demand over the stated lead time. A
business in general expects a normal distribution for most demand patterns or other
events that occur as part of normal business operations. There is a possibility that a
stock out may occur. There are various factors governing the level of safety/Buffer
stock-
Variation in demand-
A situation may occur where there is seasonal variation in demand. It may happen in
two ways. Either the demand is higher than the maximum available supply or demand is
lower than the maximum supply. The reason for seasonal variations is changes in the
environment or other cultural factors causing people to have different types of
requirements at different times of the seasonality time period.
Example: Demand for hotels and all other facilities in tourist location is much higher
during their respective tourist seasons or school vacations, different festival seasons or
other high points of social life in these locations.
Example: Demand for toys and presentation items are very high during Christmas and
other festivals when people exchange gifts. It is obvious that seasonal variations in
demand will result in seasonal variations in all activities connected with fulfilling those
activities.
Such variations in demand can be taken care by using forecasting techniques like-
i). Regression analysis- i.e. collecting past available data and analysing it for the future
strategies
ii) Method of moving average- using 3 yearly moving averageaverages and forecasting
the demand for the next year.
iii) Exponential smoothing analysis- helps to forecast the demand for an in between
month in a particular year.
Supplies- timing and Quantity- Variations in the suppliers lead time can also cause
service problems. Usually it is advisable to calculate and communicate the lead time
with the suppliers but sometimes such a variation may occur due to sudden breakdown
etc. There could be an imbalance in the supply side. So in order to avoid this it is very
important-

To calculate the probability of stock out- It may require keeping additional safety stock
so as to cover the observed variation in the lead time. This information protects your
customer service by calculating a second element of safety stock and thus changing the
ROP. (Reordering point).
Detailed statistical analysis- It also requires detailed statistical analysis to calculate and
determine the cost of supplier variation. Example: One might measure the standard
deviation of the delivery lead time vs. the stated lead time. Then you can prioritize the
suppliers or products to be improved. You may upload this additional safety stock to
your planning system. Or, after seeing the cost of supplier variation, you may choose to
delete this safety stock. Armed with this information, you can prioritize the cost
opportunities to improve and control supplier variation.

CONTROL DECISIONS
Sometimes, in spite of making forecasts and using statistical analysis, a firm might face
forecast errors and may face demand and supply variation which may affect the entire
process of activities.
Service levels- In order to maintain a balance in the service level, a firm should always
check out various combinations of inventory holding, order time, order quantity etc. and
change its ROP and inventory holding accordingly so as to meet any variation in
demand efficiently.
Cost of Operations- While maintaining the service level at its optimum, its also very
important to manage the cost optimally. One needs to carry out various combinations to
decide on the optimal holding cost, carrying cost, ordering cost etc. which Which in turn
will affect the service level of the firm. One of the major cost items consists of
transportation costs for getting goods in or ensuring supplies to your customers.
Normally any priority, short lead time transport will cost lot more than a well planned
transport. Hence it is a good method to gain good lead time by continuous
communications with customers as well as suppliers so as to avoid last minute rush and
need to hire such high priority transport. For this a firm must carry out iterative
processes of finding out the lowest optimal cost by using various trials and errors and
thereby ensure that the over targets are met.

MULTIPLE ITEM MANAGEMENT

Multiple item management is about handling a set of items on basis of importance. Here
all the materials are analysed and categorized on the basis of importance and priority
for which various techniques are used.
Using ABC analysis (Always better Control) - In supply chain, ABC analysis is
an inventory categorization method which consists of dividing items into three
categories, A, B and C: A being the most valuable items, C being the least valuable
ones. This method aims to draw managers attention on the critical few (A-items) and
not on the trivial many (C-items). This technique is based on the usage value of an item
. usage value can be calculated as:- usage value = price/ X consumption.

(ABC = Always Better Control)
This is based on cost criteria. Or it can also be based on value or any other characteristics which can
be applied uniformly for entire population of items or products
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
A Items:
Small in number, but consume large amount of resources
Must have:
Tight control
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management

B Items:
Intermediate
Must have:
Moderate control
Purchase based on rigid requirements
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Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management

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

Is carried out for cross combination of two different criteria. One may be the standard
value based criteria like price / cost of items. Second criteria may be on basis of
criticality of needs or contribution that a particular client, sales outlet or any contributor
makes to overall business. This cross combination will ensure that all critical high value
items are available at each location as well as all items required at a fast seller location
are also available at such high critical location. This technique is useful for maximizing
revenue or value to customer as well as improving sales performance of selected
outlets. The tables below show results of such combinations or performance.

Value Based Analysis

Category Items % Items % Usage
A 12 4 75%
B 32 11 21%
C 278 85 4%
Criticality Based Analysis
Category Items % Items % Usage
I 8 2.5 65%
II 47 16 26%
III 267 81.5 9%
Application Of Controls
Actions AA BB CC
Counting
Frequency
Monthly Quarter/Six Montly Annual
Order Quantity Small For Costly
Items
EOQ base as per
consumption
Large quantities
Safety Stock Large for critical
items
Large for select items Low or none
Reclassification
review
Half yearly Half yearly or as
necessary
Annual
Above 3 table shows the ABC analysis & VED analysis.

APPLICATION OF CONTROL based on above analysis helps to deliver
better performance by using steps and techniques mentioned below
1. Counting frequency: Under this technique, the A type of materials are counted
and controls verified on a monthly basis as they are the most critical and important items,
B type of materials are counted on a quarterly basis and C type of items are counted
once in a year.
2. Order Quantity: A type of items are types of items are ordered in smaller
quantities as they are very costly. B type of items are ordered as per consumption i.e.
EOQ. And C type of items are ordered in large quantities.
3. Safety stock: Safety stock is kept quite large for critical items like A, large for item
item B and smaller quantity for C item..
4. Reclassification Review: For A items review is done half yearly, for B items
itsits done half yearly or as required and C type items are reviewed annually.

1. COST/benefit analysis i.e. Profitability analysis-The cost/benefit analysis is a
strategy or formula for evaluating the potential for some type of operation or project
within the confines of a company or other organization. Essentially, the purpose of
a cost benefit analysis is to ascertain if conducting the project or operation is feasible,
given the current circumstances of the organization. As part of this process, the
cost/benefit analysis will identify the benefits that can be reasonably expected to be

gained from the effort, while also considering the impact on the organization in terms of
various types of cost to carry out the project.

2. VED Analysis- VED analysis (vital, essential and desirable). This technique is
based on criticality. Vital Production would come o haul, Essential - whose stock out
cost is very high, Desirable - items which do not cause any immediate loss of production.
This is carried out mostly for maintaining service levels for spare parts and other
inventory where cost of a particular part may not have any relationship with disaster
value of non availability of such part.

3. HML Analysis:
Classification based on unit price:
This classification is as follows:
High Cost (H) = Item whose unit value is very high
Medium Cost (M) = Item whose unit value is of medium value
Low Cost (L) = Item whose unit value is low
This type of classification helps in implementing proper control such as authorization,
expiry management; identify opportunity to find out a less expensive substitute.

All the types of inventory and situations may not be standard and thus real life situation
may need more complicated handling. Inventory optimization is critical in order to keep
costs under control within the supply chain. Yet, in order to get the most from
management efforts, it is efficient to focus on items that cost most to the business or
what the business values the most. A firm needs to make sure that it maintains a balance
between its customers and its supplies so that it maintains its service delivery and level
of competence.



Operations Session 14 - Review Notes

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MET ICSs PGDM 2013-2015 batch Session # 14

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