MODULE 5

SYLLUBUS:
Production planning and control- Importance of planning - job, batch and mass production-
Introduction and need for a new product-product life cycle. - Functions of production control -
Routing, Scheduling, dispatching and follow up- Gantt charts. Inventory Control, Inventory
models -Determination of EOQ and reorder level-simple problems- Selective inventory control
techniques.

PRODUCTION PLANNING AND CONTROL:

• Production: Production is the process by which goods or services are created. Production can
also be defined as a means of converting the raw materials into finished products by
performing a set of manufacturing operations in a pre-determined sequence.
• Planning: Planning means preparing the scheme in advance before the actual work is started.
Before starting the production, it is necessary to decide in advance what to produce, how
much to produce, where to produce and where to sell. Therefore, production planning is the
pre-determination of future achievements in type of product, volume of production, quality,
time, price in manufacture and the resources required.
• Control: Control means the supervision of all the relevant operations with the help of control
mechanism that feeds back the progress of the work. The control mechanism is also
responsible for subsequently adjusting, modifying plans and targets, in order to ensure

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attainment of pre-specified production goals, in the most efficient and effective manner.
• Production planning and control may be defined as “the direction and co-ordination of the
firm's material and physical facilities towards the attainment of pre-specified production
goals, in the most efficient and economical manner”.
• In simple words, production planning and control means:
(1) a complete plan.
(2) a follow up procedure for determining how closely the plans are being followed.
(3) a means to regulate the mechanism to meet the requirements of proposed plan.
(4) a procedure to employ right quantity and right type of personnel at the right place.
•

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OBJECTIVES OF PPC:

• To design a system and plan, by which production may be carried out with a view to meet
promised delivery date consistent with minimum cost and quality standard.
• To ensure efficient utilization of production facilities.
• To coordinate the production activities of different departments.
• To maintain adequate but not excessive stock of raw materials, work in process and of
finished goods to meet production requirements and delivery schedules at the most
economical level.
• To ensure production of right product in right quality at the right time.
• To maintain flexibility in manufacturing operations, to accommodate rush jobs or to meet
emergencies.
• To co-ordinate labour, machines and equipment in the most effective and economic manner.
• Ensuring smooth flow of materials by eliminating bottlenecks if any, in production.
• Establishing targets and checking it against performance.
• To provide alternative production strategies in case of emergencies.
Objectives of production planning:

• To determine the capacity of all manufacturing departments and to plan systematically

the production related activities within the scope of the enterprise to meet sales
requirements.
• To translate orders received from sales department into orders on the works department

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and to ensure steady plans of production activities.
• To find ways and means through which product manufacturing requirements such as
materials and their necessary constituents may be available in right quality and quantity at
the right time.
• To coordinate a number of different department groups so that a fine balance of activities
may be maintained.
• To train staff to have the effective performance of their duties.
Comparing production planning and production control:

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TYPES OF PRODUCTION (MANUFACTURING) SYSTEM
• The types of production systems can be broadly grouped into three headings according to
the volume of production and the regularity of manufacture:
1. Job production.
2. Batch production.
3. Continuous or mass production.

1. JOB PRODUCTION:
• Job order production is the manufacture of products to meet specific customer requirements
of special orders.
• The quantity involved is small, usually one off or several off.
• This type of production is mainly concerned with special projects, models, proto-types,
special machinery or equipment to perform specialised and specific tasks, components, or
subassemblies to provide replacement or repairs in existing machinery etc.
• Examples, turbo-generators, large engines, material handling systems, shipbuilding and many
other manufacturing activities are of the job production group.
• Three types of job production can be defined, according to the regularity of manufacture:
(a) A small number of pieces produced only once.
(b) A small number of pieces produced intermittently when the need arises.
(c) A small number of pieces produced periodically at known intervals of time.
• In this type of production, the products are made when orders are received from customers.

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One order may be different from the other. Therefore, prior planning becomes complex.
• Skilled labour is necessary to handle variety of jobs. General purpose equipment is used since
it can handle variety of jobs.
Characteristics of Job Order Production:

• Small production runs: Job production is characterised by the manufacture of one or few
numbers of single product designed and manufactured strictly to customer’s specification.
• The flow of materials: The flow of materials and components between different stages of
manufacture is highly discontinuous due to imbalanced operation wise work content.
• Manufacturing cycle time: Relatively long delays occur at the assembly as well as at the
material processing stages due to lack of materials or components, imbalanced work flow,
design changes, design errors detected during manufacturing etc.
• Layout of plant and equipment: The machines are arranged according to process layout.
Because the operations and their sequence change from product to product.
• Skill required: Highly skilled and versatile workers are necessary.
• Quality of supervision: Highly competent general engineers are usually engaged as
supervisors, practical men with thorough training, capable of taking independent change of
each contract are employed to work at site. Close supervision is also necessary.
• Cost of production: The unit cost of production is high. Since the firm cannot take the
advantages of large scale buying and automation.
Advantages of job production

• Individual requirements can be met.

• There is no managerial problem because of very less number of workers.
• Because of flexibility of operation, variety of products can be processed.
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• Opportunity to use innovative and creative methods.
Disadvantages of job production

• As the purchase of raw materials is less, cost of raw materials will be high.
• For handling of different types of jobs, skilled labours are needed.
• Higher set up and tooling costs due to frequent set up changes.

2. BATCH PRODUCTION:
• Batch production is the manufacture of a number of similar articles, either to meet a specific
order or to satisfy continuous demand.
• When the production of the batch is terminated the plant and equipment are available for
the production of similar or other products.
• The policies regarding tooling, fixtures, and other aids are dependent on the quantities
involved.
• In batch production, three types can be mentioned:
(1) A batch produced only once.
(2) A batch produced repeatedly at irregular intervals when the need arises.
(3) A batch produced periodically at known intervals to satisfy continuous demand.
• The planning and control become more simplified as quantities increase and as manufacture
becomes more regular.
• Two principal problems arise in batch production, the size of the batch (number of

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components to be produced per lot) and scheduling of production.
Characteristics of Batch Production:

• Short runs: Batch production is characterised by short production runs and frequent changes
in, set ups.
• Investment: Needs high investment. The production is generally made to stock.
• Planning: Planning, routing and scheduling changes with fresh batch of orders.
• Skill of labour: Skilled labour capable of handling variety of jobs is required.
• Quality of supervision: The supervisors need considerable knowledge of specific process. The
amount of supervision required in batch production is lower than that of job order
production.
• Plant layout: Plant and equipment are procured and arranged to obtain flexibility. General
purpose machines and handling equipments capable of performing variety of operations are
installed according to process layout.
• Material handling: Material handling in batch production is less as compared to job order
production.
• Flexibility in production schedule: Disruptions due to machine breakdown or absenteeism do
not seriously affect production as another machine can be used or another operator from
another machine can be shifted.
Advantages of batch production:

• Compared to mass production less capital is required.

• If demand of one product decreases, then production of other product can be increased.

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Disadvantages of batch production:

• Compared to mass production cost of sales and advertisement per unit is more.
• Raw materials to be purchased are less in quantity than that in mass production. Therefore,
it is slightly costlier than that of mass production.
CONTINUOUS PRODUCTION:

• Continuous production is the specialized manufacture of identical articles on which the

equipment is fully engaged.
• Continuous production is normally associated with large quantities and high rate of demand.
• Since identical articles are produced the operations are repetitive, production auxiliary aids,
such as special tools, jigs and fixtures material handling system, inspection devices can be
used advantageously.
• Continuous production can be classified into two types:
(1) Mass production.
(2) Flow production.
• If the management decides that a certain line should be discontinued, the machinery can be
switched over to produce another article. Such change in policy usually does not involve
major modifications in plant layout but change in tooling may be quite possible.
Characteristics:

• The volume of output is generally large and items are produced in anticipation of demand.

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• The product design, the production operations and their sequence are standardized.
• Machines and equipments are arranged according to the operations sequence.
• Machine capacities are balanced so that the material flow is uniform from input to output
end.
• Fixed path material handling equipments are used due to predetermined operations.
Advantages:

• High rate of production.

• Better usage of plant and machinery and hence less wastage.
• As raw materials are purchased on a larger scale, higher margin of profit can be made while
purchasing them.
• Few skilled and rest semi-skilled workers are required.
Disadvantages:

• Fluctuations in market demand for the products may cause plant idling or huge finished goods
stocks.
• Break down of a machine can stop the entire production line.
• High investment is needed.
• Because, all the machines are one purpose machines, this type of production is not
changeable to other types of production.
• Most of the workers handle only one type of work. They may get skill in their job but after
some time they may feel bored with the repetition of same type of work.

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PRODUCTION CONTROL:

• The production control directs and regulates all the activities of a production process. It
verifies whether the activities are going in accordance with production plan or not.
• Control is some management process which constrains events to follow plans.
• It is some sort of dynamic activity controlling the production cycle to ensure that facilities
and the personnel are economically utilised and that the products are manufactured within
minimum possible time and economically. .
Functions of production control:

• Provide raw material, equipment, machines and labour.

• To organize production schedule in conformity with the demand forecasts.
• The resources are used in the best possible manner in such a way that the cost of production
is minimized and delivery date is maintained.
• Proper co-ordination of the operations of various sections/departments responsible for
production.
• To ensure regular and timely supply of raw material at the desired place and of prescribed
quality and quantity to avoid delays in production.
• To perform inspection of semi-finished and finished goods and use quality control techniques
to ascertain that the produced items are of required specifications.
• It is also responsible for product design and development.

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PRODUCT LIFE CYCLE:

• All products and services have certain life cycles. The life cycle refers to the period from the
product’s first launch into the market until its final withdrawal and it is split up in phases or
stages.
• If a curve is drawn showing product revenue over time, it will take the shapes as shown in the
figure.
• The stages through which individual products develop over time is commonly known as the
‘product life cycle.
• A product's life cycle (PLC) can be divided into several stages characterized by the revenue
generated by the product.
• Product life cycle has four stages viz., introduction stage, growth stage, maturity stage and
decline stage.

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1. Introduction stage - This stage marks the introduction of the product into the market When
the product is introduced, sales will be low until customers become aware of the product and
its benefits. Some firms may announce their product before it is introduced but such
announcements also alert; competitors and remove the element of surprise. During the
introduction stage, the primary goal is to establish a market and build primary demand for
the product class.
2. Growth stage - Those products that survive the earlier stages tend to spend longest in this
phase. The growth stage is characterized by rapid growth in sales and profits. Sales increase
as more customers become aware of the product and its benefits and additional market
segments are targeted.
3. Maturity stage - During maturity Stage, the sales growth reaches a point above which it will
not grow. This is due to the market share taken by the competitor's products. The maturity
stage is the most profitable stage. The competing products may be very similar at this point,
increasing the difficulty of differentiating the product. During the maturity stage, the primary
goal is to maintain market share and extend the product life cycle.
4. Decline stage - At the decline stage, more innovative products are introduced or consumer
tastes have changed. At the decline stage, eventually sales begin to decline as the market
becomes saturated, the product becomes technologically obsolete, or customer tastes
change. Unit costs may increase with the declining production volumes and eventually no
more profit can be made.
ROUTING:

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• Routing may be defined as the selection of the path which each part of the product will
follow, while being transferred from raw material to finished products. Path of the product
will also give sequence of operations to be adopted while manufacturing.
• Routing is an important function of the production planning and control because, it has a
direct bearing on the “time” as well as “cost” of the operations.
• Defective routing may involve back tracking and long routes. This will unnecessarily prolong
the processing time. Moreover, it will increase the cost of material handling.
• Routing is affected by the plant layout. In fact, routing and plant layout are closely related. In
the product layout the routing is short and simple while, under the process layout it tends to
be long complex.
Routing procedure:
1. Analyze the product: The finished product is analysed and broken into number of
components required for the product.
2. Make and Buy decision: It means to decide whether all components are to be manufactured
in the plant or some are to be purchased from outside. Make or buy decision depends upon
the work load in the plant already existing, availability of equipment, labour and economy
considerations.
3. Raw material requirements: A part list and bill of materials is prepared showing name of the
part, quantity, material specifications, amount of material required etc.
4. Operations through which raw materials are to undergo are listed.
5. Machines to be used, their capacity is also listed.
6. Time required for each operation and subassemblies is listed.
7. The lot size is also recorded.
Advantages of Routing:
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• Efficient use of available resources.
• Reduction in manufacturing costs.
• Improvement in quantity and quality of the output.
• Provides a basis for scheduling and loading.

SCHEDULING:
• Scheduling may be defined as the assignment of work to the facility with the specification of
times, and the sequence in which the work is to be done.
• The facility may be man power, machine or both.
• Scheduling deals with orders and machines, it determines which order will be taken up on
which machine in which department, at what time and by which operator.
• In the words of Kimball and Kimball, “The determination of time that is required to perform
each operation and also the time required to perform the entire series as routed is
scheduling.”
Objectives of Loading and Scheduling:

• To achieve the required rate of output with a minimum of delay, and disruption in processing.
• To provide quantities of goods necessary to maintain finished inventories at levels
predetermined to meet delivery commitments.
• To have maximum utilization of men, machines and materials by maintaining a free flow of
materials along the production line.
•

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To keep the production cost minimum.
Preparation of production schedules:

• On the basis of available machine capacities, materials, and labour the master schedule, the
individual production schedule is prepared.
• The dates for the beginning and completion of the work on various processes and operations
are recorded on production schedules.
• These dates are then entered on route sheets and load charts to show machine allocation
times. The planners, therefore, prepare the detailed production schedule from the master
schedule.
• There are a number of techniques are used for scheduling such as flow process chart, Gantt
chart, network techniques, etc.
MACHINE LOADING:

• Machine load charts show the amount of work (in terms of hours, days, or weeks) that has
been assigned and scheduled to each machine, groups of identical machines or shop
departments.
• They frequently employ Gantt chart to indicate graphically the volume of work ahead of
machine/equipment and the amount of capacity available for processing additional work.
• Loading provides a complete and correct information about the number of machines
available and their operating characteristics such as speed, capacity, capability etc.
• This information can be used to calculate the difference between work load and actual
capacity and then to determine whether customers order can be completed on due date or
not.

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Objectives of Loading:

• To plan new work orders on the basis of spare capacity available.

• To balance the work load in a plant.
• To maintain the delivery promises.
• To check the feasibility of production programs.
• For eliminating bottlenecks or excess capacity at specific machines and work places.
DISPATCHING:

• Dispatch function executes planning function. It is concerned with getting the work started.
• Dispatching ensures that the plans are properly implemented.
• Dispatch function authorizes the workers to do the work. T
• he information collected in scheduling and route sheet is transmitted into the orders.
• The prepared orders are released to the concerned departments for actual implementation.
Activities of dispatching:
1. Issue of Move orders: Giving instructions regarding movement of raw materials from stores
to the manufacturing floor, or from machine to machine.
2. Issue of Tool orders: These are issued to the tool department to collect and make ready tools,
jigs and fixtures in advance of the time at which the operation will commence.
3. Issue of Job orders (job tickets): Job orders are issued to the operations or job foremen for
starting the work.

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4. Issue of Inspection orders: Inspection orders are issued to the inspection personnel giving
instructions regarding inspection centres, type of inspection required at different stages of
operations, gauges to be used etc.
5. Issue of drawings, time tickets, instruction cards and other necessary information: These
are issued to the operators, so that they will carry out their work smoothly without any
difficulty.
6. Issue of orders to finished product stores: These orders instruct the finished product store
for collecting the finished products on determined lines.
GANTT CHART:

• The Gantt chart was developed, during World War I, by Henry L Gantt.
• Gantt chart is bar chart showing the relationship of activities on a time scale.
• Gantt charts are ideal for tracking progress of activities.
• A Gantt chart essentially consists of two coordinates, the horizontal represents the time
elapsed and the vertical represents the jobs or activities performed.
• The job or activities are shown in the forms of bars. The length of the bar shows the time and
the job or activity takes for completion.
• Mostly in every project, some jobs are taken up concurrently and some are to be completed
before other can begin. Hence, some of the bars run parallel, or overlap each other and other
time-wise and some un-serially with one bar beginning after another bar ends.
• A typical Gantt chart is shown below.

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• In the bar chart shown above, activities A and B can chart at the same time and proceed
concurrently or in parallel, though they take different time intervals for their completion.
• Activity C begins 5 days after the start of activity A and B. Activity D starts after the completion
of activity B. Activity E starts 5 days after the start of activity C. Activity F and G starts after

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the completion of activity D.
• Gantt chart shows the time relationships between the ‘events’ of a production program.
Gantt chart is easy to understand and produce a useful visual summary.
• But in Gantt chart the critical activities are not identified. For complex projects with many
activities the chart becomes large and loses its benefit as a communication tool.
• Also, in Gantt chart it is not clear which activities must be completed before other activities
begin.

INVENTORY:
• Inventory is defined as the list of movable goods which helps directly or indirectly in the
production of goods for sale.
• It is just a sort of investment in the form of raw material, tools, gauges, supplies etc.
• Inventory may also be defined as a comprehensive list of movable items which are required
for manufacturing the products and to maintain the plant facilities in working conditions.
CLASSIFICATION OF INVENTORIES:

• Inventory can be classified as:

1. Direct Inventories
2. Indirect Inventories

1. Direct Inventories:
• The inventories which play a direct role in the manufacture of a product and become an
integral part of the finished product are called direct inventories.
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• Direct inventories are further classified as:
a) Raw Materials: These are the materials which are machined or processed before they
are ready to be used in assembly of the finished products. Raw materials, in other
words, are those basic materials from which components, parts and products are
manufactured by the company.
b) In Process Inventories (Work in Progress): In process inventories are the semi-finished
goods at various stages of manufacture. The output of one machine is fed to another
machine for further processing. Raw materials become work in progress at the end of
first operation and remain in that classification until they become piece parts of
finished goods.
c) Purchased Parts: These are some purchased items (components, sub-assemblies,
finished parts etc.) purchased from outside suppliers instead of manufacturing in the
factory itself. For example, ball bearings, screw, nuts, bolts, tyres required in
automobile industries.
d) Finished Goods: Finished goods inventories are the finished (final) products ready for
dispatching to the customers.

2. Indirect Inventories:
• Indirect inventories are those materials which help the raw materials to get converted
into the products, but do not become an integral part of the finished products.
• Indirect inventories are further classified as:

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a) Tools: Various tools used for processing are classified as :
I. Standard tools used on machines such as lathe tools, milling cutters, drill,
reamers, form tools, etc.
II. Hard tools, such as hand saws, chisels, hammers, mallets, pliers, spanners,
wrenches etc.
b) Supplies: It includes materials used in running the plant but do not go into the
product. Supplies include:
I. Miscellaneous consumable such as brooms, cotton waste, toilet paper,
vim powder, jute etc.
II. Welding, soldering and tinning materials such as electrodes, welding
rods, solder etc.
III. Abrasive materials such as emery cloth, emery belts, sand paper etc.
IV. Empties such as bags, glass bottles, cardboard boxes, drums, jars, tins etc.
V. Oils and greases such as kerosene, transformer oil, patrol, diesel,
lubricating and cutting oils.
VI. General office supplies such as candles, sealing wax, ink and ink pads,
nibs, pencil and refills, files, pins, clips, carbon paper, stencil paper,
erasers etc.

INVENTORY CONTROL:
• Inventory control may also be defined as the scientific method of finding how much stock
should be maintained in order to meet the production demands and be able to provide
right type of materials at right time in the right quantities and at competitive prices.
• Too much inventory creates a problem of their storage, huge investment and the
maintenance of stored items. However, low inventory leads to chances of stoppage of
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 production, increase in overheads and disruption in production schedules and delivery
promises.
Need for inventories:
• To ensure against delays in deliveries.
• To allow for possible increase in output.
• Maintain smooth and efficient production flow.
• To take advantage of quantity discounts.
• To utilize to advantage price fluctuations.
• To ensure against scarcity of materials in the market.
• To have a better utilization of men and machinery
Functions of inventory control:
• Purchasing material at an economical price at proper time and in sufficient quantities so
as not to run short of them at any time.
• Providing a suitable and secure storage location.
• Developing a definite inventory identification system.
• Providing adequate and responsible store room staff.
• Periodic inventory checkup.
• Inventory control should avoid built of stock levels beyond what needed.
Advantages of good inventory control:
• Production activity does not face shortage of materials.
• Sales activity does not face shortage of finished goods.

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• Materials in appropriate quantity procured in time minimize the defects in finished goods.
• Delays in production schedules are avoided and production targets are achieved.
• Accurate delivery dates build up reputation and better relations with customers.

TERMS USED IN INVENTORY CONTROL:

• Demand: It is the number of units required per unit time.

• Maximum quantity: Maximum limit to which the inventory can be kept in stores at any
time.
• Minimum quantity: Minimum limit of inventory which should be kept in stores at any
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 time.
• Standard order: It is the difference between maximum and minimum quantity.
• Reorder point: It is the point at which stock replenishment (refill) should he initiated.
When the stock level reaches reorder point, the order is placed.
• Reorder quantity: It is the quantity to be ordered at the reorder point.
• Lead time: Duration of time between placing of order and receipt of items.
• Order cycle: It is the time period between two successive cycles,
• Safety stock: Safety stock is the stock maintained to meet the unanticipated demand. It is
also called as buffer stock or minimum stock.

INVENTORY MODELS:
• Inventory models are concerned how much to order and when to order so as to minimize
the total cost.
• There are different models of inventory. Economic Order Quantity (EOQ) with
instantaneous stock replenishment (basic inventory model) and inventory model with
instantaneous stock replenishment when shortages are permitted are discussed below.

1. Basic inventory model (Economic Order Quantity)

• In this model of inventory, orders of equal size are placed at periodical intervals.
• The items against an order are replenished instantaneously and the items are consumed

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at a constant rate.
• This pattern of inventory variation resembles a saw tooth hence it is called as saw tooth
pattern of the inventory control.

• The basic inventory model helps to find out the order quantity which minimizes the total
costs (sum of ordering costs and inventory carrying costs).
• This EOQ model is used to find out the order quantity or lot size which economizes the
total cost of ordering and carrying the materials in the store. It is also called the Wilson
Rule.
• Economic Order Quantity refers to how much material may be ordered at a time which is
economical. The ultimate intent of determining EOQ is to minimize the combined costs
of acquiring and carrying inventory.
• The evaluation of most economic quantity to be purchased involves the calculation of
procurement cost or buying cost and inventory carrying cost.
• Procurement cost includes expenditure on:
➢ Calling quotations.
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 ➢ Processing quotations.
➢ Placing orders.
➢ Receiving and inspecting.
➢ Verifying and payment of bills.
➢ Other incidental charges.
• Inventory carrying cost consists of expenditure made on
➢ Insurance.
➢ Storage and handling.
➢ Depreciation.
➢ Deterioration.
➢ Taxes.
➢ Interest, etc.

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• Procurement costs and inventory carrying costs have been plotted with respect to
quantity in lot. Total cost is calculated by adding procurement cost and carrying cost. Total
cost will be minimum at point A and thus A' represents the Economic Order Quantity or
Economic lot Size.
• Let. Q = Economic order quantity,
A = Total items consumed per year,
P = Procurement cost per order and
C = Annual Inventory carrying cost / item / annum
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝐶=
𝑡𝑜𝑡𝑎𝑙 𝑖𝑡𝑒𝑚𝑠 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

• Total annual inventory carrying cost = Total items consumed/year × cost per item × % of
inventory carrying cost.
• Inventory cost per year = Average value of inventory in a year × Annual inventory carrying
cost/item.
𝑄
= ×𝐶
2
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑡𝑒𝑚𝑠 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑
• 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑝𝑙𝑎𝑐𝑒𝑑 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑡𝑒𝑚𝑠 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

• Procurement cost per year = number of orders placed in a year × cost per order
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 𝐴
= ×𝑃
𝑄

𝑄 𝐴
• 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = ×𝐶+ ×𝑃
2 𝑄

𝐴 𝑄
• This cost will be minimum, when ×𝑃 = ×𝐶
𝑄 2

2×𝐴×𝑃
• ∴ 𝑄2 =
𝐶

𝟐𝑨𝑷
• Hence, most Economic Order Quantity, EOQ = 𝑸 = √
𝑪

2. Inventory model with shortages are permitted:

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• If the shortages or stock outs are allowed in the inventory control, the cost of shortages will
also be there.
• If orders are received when inventory level falls to zero and demand or requirement
continues, the situation arises where negative inventory or stock out will be there.
• If there is no stock at the time of receiving a request for the items, it is assumed that it will
be satisfied at a later date with a penalty termed as back order cost.
• In this model, the items on order will be received instantaneously and they are consumed at
a constant rate.

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3. Fixed order quantity and variable cycle system (Q system):
• When this system is used, the quantity ordered every time is fixed and the number of cycle
for which orders are placed and cycle time may vary.
• It is also called continuous review system.

• In this system, the order quantity (Q) is fixed and ordering time varies according to the
fluctuations in demand.
• In this system of inventory, whenever the stock level touches the reorder level, an order is
placed for a fixed quantity (Q), which is equal to EOQ.
• Order quantity Q is decided in such a way so as to minimize the total cost of procurement

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(production), storage, handling, distribution and other changes of inventory. The safety stock
is always present in this system.
4. Fixed cycle and variable quantity system (P system):

• This is also called periodic review inventory system.

• In this system, period of review is fixed and quantity ordered change as per demand or rate
of consumption.
• The period of review P is decided such that the order quantity is economical to purchase the
items. When the amounts that need to be withdrawn from inventory are allowed to vary from
period to period, the EOQ formula no longer ensures a minimum-cost solution.
• Period of this system typically results in larger inventory levels for a periodic inventory system
than in a continuous system to guard against unexpected stock outs early in the fixed period.
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• Periodic inventory review reduces the time a business owner or manager spends analyzing
inventory counts, which allows more time for other aspects of running the business.
• However, it may not provide accurate inventory counts for businesses with high-volume
sales.

Comparison between Q-system and P-system:

SELECTIVE INVENTORY CONTROL TECHNIQUES:

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• Selective control refers to the variation in method of control from item to item in some
selection basis.
• In this system, the items are categorized in a few groups depending upon the selected criteria
such as value, usage and frequency of consumption, etc.
• The various types of classification are shown in the table below.

1. ABC analysis:
• The ABC classification system is grouping items according to annual sales/production
volume and to identify the small number of items that will account for most of the
sales/production volume and that are the most important ones to control for effective
inventory management.
• As the size of the industry increases, the number of items to be purchased and to be
taken care of also increases. ABC analysis helps to identify the values of items and how
much effort is required to manage inventory.
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 • Under the ABC analysis the inventory items are categorized as ‘A ’ class items, ‘B’ class
items and ‘C’ class items.
• The ‘A ’class items are high valued but are limited in number. They need care and close
inventory control. Such items should be purchased well in time. The ‘A ’ class items
generally accounts for about 70-80% of the total inventory cost and they constitute
about 10% of the total items.
• The 'B' class items are medium valued and their numbers lies between ‘A’ and ‘C’ items.
Such items need moderate inventory control. They are more important than ‘C class
items. These items are comparatively low inventory carrying cost and constitute about
15-20% of the total items.

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• The ‘C ’class items are low valued but maximum numbered items like clips, pins, etc. Such
items need very less inventory control. The ‘C’ class items generally account for about 10-
15% of the inventory cost and constitute about 75% of the total items.
• An inventory control system should be directed towards ‘A’ class items because this is
where the major economies can be achieved. Thus, careful attention is paid for inventory
control in case of ‘A’ class items, less attention for ‘B’ class items and the least attention
is paid for ‘C’ class items.

2. HML analysis:
• HML analysis is similar to that of ABC analysis. The items under this analysis are classified
into High, Medium and Low price according to their unit price.
• To Classify the items are listed according to the descending order of their unit price. The
cutoff is then fixed for each category.
• For e.g. An item above the price of Rs.1000 can be classified into 'H’ category. An item in
between the price range of Rs.150 to Rs.1000 can be classified into ‘M’ category and
below Rs. 150 can be classified into ‘L’ category.

3. VED analysis:
• VED analysis classifies the items into three categories as Vital, Essential and Desirable.
• Vital category items are those items for which the production may stop. Essential are
those items whose stock outs may cost very high and Desirable are those items that do
not cause any loss to the production.
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 • The VED analysis helps in focusing the attention of the management on vital items and
ensuring their availability by frequent review.

4. SDE analysis:
• This classification is carried out based on the lead time required to procure the spare part.
The classification is as follows.
a) Scarce (S) - Items which are imported and those items which require more lead time.
b) Difficult (D) - Items which require less lead time compared to scare items, but
reasonably more lead time.
c) Easily available (E) - Items which are easily available i.e., less than a fortnights' lead
time.

• This classification helps in reducing the lead time required at least in case of vital items.
Ultimately, this will reduce stock-out costs in case of stock-outs.

5. FSN analysis:
• F, S and N stand for Fast moving, Slow moving and Non-moving items. This form of
classification identifies the items frequently issued, less frequently issued for use and the
items which are not issued for longer period.
• This classification helps spare parts management in establishing most suitable stores

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layout by locating all the fast-moving items near the dispensing window to reduce the
handling efforts.

6. SOS analysis:
• SOS analysis is based on seasonality of items and it classifies all the items into two
categories viz., ‘Seasonal’ and ‘Off Seasonal’.
• The analysis helps in identifying items that are available only during a particular season
for e.g. raw mangoes are only available only during a summer and identifying items that
are non- seasonal.

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