SPECIAL NOTES SEMESTER EXAMS

C.S.E./I.T.
5TH SEMESTER PART-2
UNIT-3 Materials Management
1. Materials Management- definition, functions, importance,
relationship with other departments.
2. Purchase – Purchasing systems, purchase procedure, terms, and
forms used in purchase.
3. Storekeeping – functions & classifications, advantages &
disadvantages and applications in actual practice.
4. Functions of Stores, types of records maintained by store, various
types and applications of storage equipment, need and general
methods for codification of stores.
5. Inventory Control: Definitions, Objectives, Derivation for
expression for Economic Order Quantity (EOQ) & Numeric
examples. ABC analysis.
6. Various types of inventory models, Wilson’s inventory Model.
7. Material Requirement Planning (MRP)

Unit -3
1. Materials Management- definition, functions, importance,
relationship with other departments.

Materials management is a core function of supply chain management that involves

planning, organizing, and controlling the flow of materials through a business:

• Definition

Materials management is the process of planning, organizing, and controlling the flow
of materials from procurement to use in production or distribution.

• Functions

Materials management includes activities such as purchasing, storage, inventory

control, material handling, and standardization.

• Importance

Materials management is important because it ensures that a company has an

uninterrupted supply of materials for production, meets customer demands, and saves
costs.

• Relationship with other departments

Materials management works within the supply chain to ensure that a company can
predict and fulfil its material requirements.
Some objectives of materials management include:

• Purchasing goods and services at the right time, quality, quantity, and price

• Creating and managing good relationships with suppliers

• Optimizing the use of resources to achieve cost efficiency, timely availability, and
quality assurance.

2. Purchase – Purchasing systems, purchase procedure, terms, and

forms used in purchase.

• Purchase requisition

A document that describes the items or services needed and is submitted to the
purchasing manager or procurement department. It includes the justification for the
purchase, the quantity and description of the items, and the date they are needed.

• Purchase order

A legal document that outlines the items to be purchased from a supplier. It includes
the quantity, price, delivery information, and payment conditions. A purchase order is
an official offer between the buyer and the seller that becomes a legal contract when
accepted by the seller.

• Procurement process

A framework that a business uses to ensure efficiency, savings, and maximum value
when making a purchase. It involves researching, negotiating, and maintaining vendor
relationships.

• Purchasing system

A process that includes purchasing from requisition through payment and product
receipt. It ensures that only needed purchases are made at reasonable prices.

Some steps in the purchasing process include:

• Identifying the need

• Specifying the requirement

• Finding and choosing a supplier

• Negotiating costs

• Getting order approval

• Placing the order

• Receiving and approving the order

• Reviewing supplier performance

Storekeeping – functions & classifications, advantages &
disadvantages and applications in actual practice.

Storekeeping is the process of managing the physical storage of inventory items, such
as raw materials, supplies, and finished products. Storekeeping is important for
businesses to operate smoothly and avoid stockouts. Some of the functions of
storekeeping include:

• Receiving, storing, and issuing inventory

Storekeepers ensure that inventory is received, stored, preserved, and issued in a way
that prevents overstocking and understocking.

• Maintaining safe custody

Storekeepers are responsible for ensuring that materials are handled safely and do not
deteriorate.

• Taking safety measures

Storekeepers ensure the safety of the warehouse, materials, and the people working in
the store.

• Maintaining storehouse cleanliness

Storekeepers ensure the storehouse is kept neat and tidy.

There are two main types of storekeeping: centralized and decentralized. In centralized
storage, the entire organization uses a single store, while in decentralized storage,
separate stores are attached to different departments. The best approach depends on
the needs of the business.

Objectives of Store keeping

An efficient system of storekeeping has the following objectives:

• To ensure uninterrupted supply of materials and stores without delay to various

production and service departments of the organization.

• To prevent over-stocking and under-stocking of materials.

• To check all materials in terms of quality and quantity.

• To minimize storage costs.

• To ensure effective and continuous control over materials.

• To ensure optimal utilization of available storage space and workers engaged in

storekeeping processes.

• To protect materials from loss and wastage due to defective storage.

• To identify and locate materials in storerooms without delay.

• To protect and safeguard material items from pilferage, theft, fire, and others.
• To develop a system that provides complete and up-to-date information about
all stored items.

Store Keeping Functions

The main functions of storekeeping are performed in an organization's Stores
Department. They include:

• Issuing purchase requisitions when material is required.

• Receiving purchased stores from the Receiving Department and verifying that
every lot of stores is supported by an indent, a purchase order, and an inspection
note.

• Preparing Goods Received Note in accordance with the different stores lots
received.

• Ensuring that all the Goods Received Notes are regularly posted to the Bin Card.

• Placing and arranging stores received in suitable places and adhering to the
golden principle of storekeeping: "A place for everything in its place."

• Minimizing storage, handling, and maintaining costs by preserving and handling

materials in the most economical and efficient manner.

• Issuing stores to various business departments and ensuring that all issues are
properly authenticated and accounted for.

• Ensuring adherence to issuing procedures and organizational systems and

guidelines.

• Periodically reviewing the inventory by initiating inventory control

systems (e.g., perpetual inventory control system and ABC system of inventory
control).

• Disclosing fullest and up-to-date information about the availability of stores

whenever required. This depends on maintaining proper stores records with the
help of Bin Cards and a Stores Ledger.

• Safeguarding materials from theft, pilferage, fire, and others.

• Supervising and coordinating the duties of different staff working under the
direction of the storekeeper.

• Preventing the entry of unauthorized persons in the stores.

• Maintaining proper stock levels, which are fixed in respect of every item of stores
and replenishing them when necessary.
Functions of Stores, types of records maintained by store, various
types and applications of storage equipment, need and general
methods for codification of stores.

Store layout

The layout of a store includes the receipt, storage, and issue of materials. A well-
arranged store uses space efficiently and minimizes handling.

• Store records

Stores maintain records such as bin cards, receipts of materials, issue of materials, and
store accounting.

• Storekeeper responsibilities

Storekeepers perform a variety of tasks, including:

• Returning defective or damaged stock: Storekeepers return, pack, label,

and price goods. They also inspect deliveries for damage or
discrepancies, and report damaged inventory for reimbursement and
record-keeping.

• Handling merchandise purchases: Storekeepers process and record

payments for products, whether they are standard items or special
orders.

• Store functions

Stores have many functions, including:

• Preserving stored materials and preventing their deterioration

• Ensuring the safety of all items and materials

• Acting as a custodian and controlling agent for stored materials

• Providing service to users of stored materials

• Inspecting and accepting incoming products

• Identifying and temporarily storing products

• Moving goods where needed

• Inventory accounting and records management

• Packaging and shipment

some types of records that a store might maintain:

• Accounting records: Track business transactions, including income, equity, and

expenses.

• Administrative records: Document and support operational or administrative

activities, such as finance, human resources, and equipment.
 • Inventory records: Track the inventory being received and used, which helps
ensure inventory visibility and proper balancing of inventory levels.

• Point-of-sale (POS) records: Track individual items sold or purchased, sales or

purchase prices, sales tax due, vendor names, invoice numbers and amounts,
and methods of payment.

• Prescription records: A common record-keeping requirement for retail drug

stores.

Other types of records that a business might maintain include:

• Business records, such as client and customer lists, referral sources, and
research and development reports

• General ledger, which maintains a company's transactions and financial

statement data

When reviewing records, it's important to identify the type of records, the form they exist
in, and how long they're being retained.

Types of Warehouse Storages and Storage Equipment in a Warehouse

• Selective Pallet Racking.

• Push-Back Pallet Racks.

• Motorized Mobile Pallet Rack.

• Material handling equipment is any machine or tool that is

used to transport, process, store, or package materials. For
example, forklifts, conveyors, shelves, and even autonomous
mobile robots (AMRs).

• Using material handling equipment improves efficiency and

can help automate processes that would otherwise require a
lot of manual labor, saving you time and money. Common
uses for material handling equipment include processing
agricultural products like grain, organizing and storing
inventory in a warehouse, and loading and unloading dirt or
hardscape.

• In this post, we go over the four material handling categories

and the equipment within each category, so you can choose
the right tools for your workflow.

The four main categories of material handling equipment are storage and handling
equipment, industrial trucks, bulk material handling equipment, and engineered
systems.

This chart breaks down the common uses and tools for each category:
 Industrial
Storage Bulk
Trucks and Engineered Systems
and Handling Equipment Material Handling Equipment
Machines

Transporting
Storage and inventory, materials to
Used Storing, transporting, or Packaging, shelving,
organization, and a
for processing materials in bulk or storing materials
preparation designated
area

Forklifts, Palletizers,
Type
Shelves, storage racks, order Conveyors, hoppers, and automated guided
of
and mezzanines pickers, and reclaimers vehicles, and
tools
pallet jacks warehouse robots

Codification is a system for identifying and classifying items in a store to bring order and
standardization. It's useful for organizations with large inventories as it allows for
efficient identification, storage, and accounting.

Here are some methods for codification:

• Alphabetical: Uses letters to identify items

• Numerical: Assigns numbers to each heading and sub-heading

• Alphanumeric: Uses a combination of letters and numbers

• Color: Uses colors to identify items

• Arbitrary: Uses an arbitrary system to identify items

• Mnemonic: Uses a mnemonic system to identify items

• Decimal: Uses a decimal system to identify items

• Frisch: Uses a Frisch system to identify items

Barcodes are another method for codification that can help with inventory
management. They can help to avoid confusion over labeling and ensure that the
correct items are collected from stock.
Inventory Control: Definitions, Objectives, Derivation for expression
for Economic Order Quantity (EOQ) & Numeric examples. ABC
analysis.

Inventory control is the process of ensuring that a business has the right amount of
stock to meet demand while minimizing holding costs. The primary objectives of
inventory control are to:

• Meet customer service levels: Have the right products available in the right
quantities, at the right time, and in the right place

• Optimize inventory holding costs: Minimize the cost of ordering and carrying
inventory

Some inventory control techniques include:

• Perpetual inventory system: Automatically updates inventory balances as

products are sold or received

• Safety stock: Also known as "buffer stock", this is extra inventory to mitigate the
risk of stockouts

• ABC analysis: Classifies inventory items based on their consumption value

• Min-max inventory control: Sets minimum and maximum stock levels for
specific items

• Just-in-time (JIT) inventory: Aligns raw material orders from suppliers with the
production schedule

Other inventory control techniques include: Two-bin or three-bin systems, Fixed order
quantity, Fixed period ordering, Barcode scanning, and Forecasting.

Inventory control software can help businesses ensure they have enough stock to meet
demand while minimizing holding costs.

Inventory control is the process of managing stock once it arrives at a warehouse, store
or other storage location. It is solely concerned with regulating what is already present,
and involves planning for sales and stock-outs, optimizing inventory for maximum
benefit and preventing the pile-up of dead stock.

What is inventory control?

Inventory control refers to the use of techniques to control inventory in warehouses to

minimize stock in hand while fulfilling customer orders on time. Various techniques like
two bin method, quality control, barcode scanning, forecasting, etc., are used for
controlling inventory.

What does inventory control depend on?

Let’s see the parameters that affect inventory control.

• Item lead time

• Shelf life of perishable items

 • Seasonal inventory items

• Customer demand

• Available storage space

Inventory control objectives

We’ll talk about inventory control in more detail soon but before that, let’s see what are
the objectives of inventory control.

Ensure stock availability

Having the right inventory levels is only a part of the problem to ensure smooth flow of
goods in warehouses. For a manufacturing company, there are bottlenecks caused by
disorganized warehouse structures or related items being placed too far away. Inventory
control’s objective here is to ensure a steady supply of raw materials and
subassemblies (manufactured or outsourced) from the warehouses without
interruptions for fulfilling manufacturing orders on time. This also applies to distribution
businesses where inventory has to be picked and packed for shipping orders.

Prevent wastage

Inventory waste happens in two cases—either the stock is defective or the stock has
expired. It also happens when stock is idle and there’s no market demand. Here,
inventory control aims to prevent defective stock from entering your warehouses with
quality control, and to prevent dead stock or accumulation of expired items.

Maximize profitability

Poor inventory control impacts profits negatively. This is not surprising once you realize
that one of the other objectives is avoiding stock wastage. Not only that, but poor
inventory control also means difficulty in picking items from warehouses where
required, be it manufacturing orders or distribution activities. If the orders are not
fulfilled on time, customers won’t be happy. Hence, good inventory control positively
impacts revenue in two ways—by avoiding money lost in expired stock and eliminating
any inefficiencies during stock movements between storage areas.

Save storage space

Stocking inventory requires physical space. Actively managing your inventory,

warehouse layouts, locations, saves on warehouse space and hence rent costs. It also
involves doing away with excess stock, dead stock, and expired stock. If your storage
areas are planned well and aren't occupied by dead stock, you’ll be saving on storage
space for the products that sell better.

6 Inventory control methods

Let’s talk about inventory control methods, techniques, and formulas. As we already
discussed, today, inventory control is a lot more than simply counting stock.

1. Two bin method

To avoid inventory shortage, the items are stored in two bins. When the first bin
becomes empty, stock from the second bin starts getting used and at the same time,
replenishment is done in the second bin.

2. Barcoding

UPC/EAN barcodes are black lined symbols with 12 or 13 digit numbers under the lines.
In ERP/inventory software the printed barcodes can be scanned to update quantities in
transactions. It’s similar to what you see at the cashier in a store but industries may use
wearable barcode devices for better efficiency.

3. Labelling

Labeling refers to identifying different inventory items with specific labels. Barcodes are
used universally to identify units but in warehouses, companies use SKUs to
track different types of items. Labeling via easy to read SKUs helps to find and pick
stock for shipments.

4. FIFO and LIFO

Using inventory is done in two ways FIFO and LIFO. Both have their advantages and
industries where it makes more sense to use them.

• First in first out: The oldest units are chosen for orders. It’s common when
companies deal with perishable items. Batch numbers are associated with
expiration dates and simply the older batches are selected for order fulfillment.

• Last in first out: The newest units are sold first. Although uncommon and even
impractical for perishable items, LIFO is done in industries where the cost of
acquiring new goods is ever increasing. It benefits revenue booking and reduces
tax liability.

5. Stock bundling

Bundling different items together to create product bundles is a common operation that
helps companies introduce new products or sell older ones that are sitting idle. Simply
creating bundles with new/old items with popular products increases sales, you can
also offer discounts on bundles to make attractive deals and speed up sales.

6. Quality inspection

The operations of controlling the quantity of stock items falls under inventory control.
However, the act of setting and defining the quality standards is a part of inventory
management. From a control perspective, regular quality inspections when the stock
enters and exits warehouses should be mandated. Over time you’ll find suppliers that
consistently send quality materials. In case of a manufacturing business, you should
consider incorporating concepts like lean and six sigma to increase quality and reduce
defects.

Inventory control vs inventory management

Although they sound similar, inventory management is a broader concept that

encompasses everything from stock procurement to selling it to the customer. Inventory
control is more about daily operations that take place in warehouses to prevent
inefficient movement, inventory expiration, wastage due to bad quality, etc. Here’s a
table to explain the differences:

Inventory control system (ERPNext)

Let’s see the different inventory control parameters and techniques in action with
software. Consider this an example of inventory control driven by ERPNext.

Before getting into inventory control, you’ll choose the best suppliers and procure the
required items in the early days of your business. A few weeks in is where you’ll have to
think about inventory control problems like automating stock counting in transactions,
shelf life, quality, wastage, bin placements, stock grouping, etc.

1. Quality control and inspection

Every item or batch that enters your warehouse should be inspected before being
accepted. You can set the parameters for different items based on what qualifies good
vs defective units. In the below example, for a medical syringe, we’ve demonstrated
parameters like needle sharpness, damages to body, etc.

To enable this in ERPNext, go to the item form and enable the inspection required
options. Quality inspections can happen when receiving items to your warehouses and
also when it leaves your warehouses for delivery.

2. Scanning barcodes for auto update

Manually counting inventory is boring not to mention takes a lot of time. By printing and
sticking UPC/EAN codes to items and running a barcode scanner, you can automatically
update the quantities in your stock transactions. Simply having the familiar UPC/EAN
barcode stuck to items and scanning them quickly to auto update information in your
software system saves a few seconds on each item. But hours and even days when
doing large quantities.

After a point, using barcode scanners is easier than manually entering stocks. In stock
entries and purchase/sales transactions simply scanning the stored barcodes will
automatically update the quantity in your transaction.

First, you need a compatible barcode scanner connected to the computer/laptop. Then,
you need to ensure that the UPC/EAN code is stored in the Item master. Scanning will
not work if the code is not stored. But don’t worry, you only need to store this once for
each item.

Now, simply use the barcode scanner and the item count will be updated in
transactions. The barcodes can be generated and printed from here:

This also works with smartphones where you can use your smartphone’s camera to
scan the barcodes. Note that this can be slightly slower depending on the phone you
use.
3. Warehouse account to know profits

To maintain company-wise stock balances, every warehouse must belong to a

company. To enable this, every warehouse should be linked to a general ledger account.

By creating a ledger account with the same name as a warehouse, you can directly track
all profits and losses tied with that warehouse. This will help you determine which
warehouses are the most profitable by comparing it with the rents you pay or the
efficiency of storage space being used.

To do this, create a GL account under the appropriate group account. Then, link the
newly created warehouse to the warehouse of the same name. In the following
example, the warehouse name is “Chawla Traders” which is linked to the account
“Chawla Traders”.

After linking, the warehouse account will show up in the chart of accounts from where
you can view the financials.

4. Ensuring correct stock availability

By using different stock reports in ERPNext, you can understand various aspects of your
stored inventory. In the context of inventory control, let’s see a few of them.

The item shortage report gives details on actual quantity, ordered quantity, reserved
quantity, and projected quantity.

For a quicker view, the stock summary shows the reserved quantity and actual quantity
of different items.
5. Stock shelf life

Another important aspect of inventory control is shelf life. If you store items that have
an expiry date associated with them, this should also be factored into the decisions you
make.

In ERPNext, see the stock ageing report to understand which items are close to expiry.

6. Batching inventory

You can also group items in batches which have their expiry dates. Batching enables
you to identify the materials closer to their expiry date and avoid wastage. This is
extremely important in case of pharmaceuticals and food items.
The Batch Item Expiry Status report shows the expiry date of items with batches.

7. Stock picking

Speaking of batches, when fulfilling customer orders, you’d want to manually choose
batches whose expiry date is close. By using older stock first, you ensure that they don’t
sit idle in your warehouse and end up being dead stock leading to losses.

You can pick items from different warehouses. Moreover, if the items are serialized, you
can also choose the serial numbers which will fulfill the order.
Economic Order Quantity (EOQ) is a production-scheduling model that helps
companies determine the ideal quantity of units to purchase to minimize inventory
costs while meeting demand. The EOQ formula is:

𝐸𝑂𝑄=2×𝐴𝑛𝑛𝑢𝑎𝑙𝐷𝑒𝑚𝑎𝑛𝑑(𝑖𝑛𝑢𝑛𝑖𝑡𝑠)×𝑂𝑟𝑑𝑒𝑟𝐶𝑜𝑠𝑡𝑝𝑒𝑟𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑂𝑟𝑑𝑒𝑟÷𝐴𝑛𝑛𝑢𝑎𝑙𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔𝐶𝑜𝑠
𝑡 𝑜𝑟 𝐻𝑜𝑙𝑑𝑖𝑛𝑔𝐶𝑜𝑠𝑡𝑝𝑒𝑟𝑈𝑛𝑖𝑡√

Here's an example of how to calculate EOQ:

• If a company sells 1,000 t-shirts per year, the order cost is $1.50, and the holding
cost is $3, then the EOQ is 31.6.

• Rounded up, the ideal order size is 32 t-shirts.

• To meet demand, the company will need to place about 31 orders of 32 t-shirts
per year, or about one order every 12 days.

Holding costs, also known as carrying costs, are the costs a business incurs for storing
inventory. These costs include storage space, rent, insurance, property tax, and
employee costs. Ordering costs are the costs that occur each time inventory is ordered,
such as the cost of processing the order, creating the purchase order, and receiving and
inspecting the goods.

What Is Economic Order Quantity (EOQ)?

Economic order quantity (EOQ) is the ideal quantity of units a company should
purchase to meet demand while minimizing inventory costs such as holding costs,
shortage costs, and order costs. This production-scheduling model was developed in
1913 by Ford W. Harris and has been refined over time. The economic order quantity
formula assumes that demand, ordering, and holding costs all remain constant.
Key Takeaways

• The economic order quantity (EOQ) is a company's optimal order quantity that
meets demand while minimizing its total costs related to ordering, receiving, and
holding inventory.

• The EOQ formula is best applied in situations where demand, ordering, and
holding costs remain constant over time.

• One of the important limitations of the economic order quantity is that it

assumes the demand for the company’s products is constant over time.

The formula for Economic Order Quantity (EOQ) in inventory management is EOQ = √
[2DS/H], where:

• D: is the annual demand, or the number of units sold annually

• S: is the setting cost

• H: is the holding cost

Here are the steps to calculate EOQ:

1. Multiply the annual unit demand (D) by the cost per order (O)

2. Multiply that answer by two

3. Divide that number by the holding costs per unit (H)

4. Take the square root of that number to get the EOQ

EOQ helps businesses determine the optimal amount of inventory to order to reduce
costs. The total cost of inventory is the sum of the purchase, ordering, and holding
costs.

The Economic Order Quantity (EOQ) is a mathematical formula that helps businesses
determine the optimal order quantity to minimize inventory costs. The EOQ formula is:
[1, 2, 3]

EOQ = \sqrt{2 \times (Annual demand in units) \times (Order cost per purchase order)}
\div (Annual holding cost per unit) [2]

Here are some examples of EOQ problems:

Example 1

If the annual consumption is 14,300 kg, the cost of placing an order is Rs 100, the
purchase price of raw material is Rs 10, and the carrying cost is 20% per year, then the
EOQ is approximately 1196 kg.
Example 2

If the monthly consumption is 2,500 units, the cost of placing an order is Rs 150, the
cost per unit is Rs 20, and the carrying cost is 20% per year, then the EOQ can be
calculated using the EOQ formula.

The EOQ is the point where the total cost curve, which is the sum of the holding and
ordering costs, reaches its minimum. The value of the EOQ depends on the annual
demand, the holding cost per unit per year, and the ordering cost per order.

Example of Economic Order Quantity

Example 1:

Calculate the EOQ from the available particulars,

• Consumption of material per annum: 10,000kg

• Cost of making an order: ₹25

• Cost of raw material per kg: ₹5

• Storage cost: 10% on average inventory

Solution:

D = Unit Consumed = 10,000

S = Ordering Cost = ₹25

H = Inventory Carrying Cost= 10% of 5 = ₹0.5

EOQ=2DSHEOQ=H2DS

EOQ=2×10,000×250.5EOQ=0.52×10,000×25

EOQ=5,00,0000.5EOQ=0.55,00,000

EOQ=10,00,000EOQ=10,00,000

EOQ = 1,000

Here, the EOQ = 1000 Kg, which represent the optimum size of an order where the
carrying cost and ordering cost will be minimum.

ABC analysis is a method for categorizing inventory items into three groups based on
their importance and value to a business:

• A items: High-value items that are important to the business and require close
monitoring and accurate records

• B items: Moderately important items that are less tightly controlled than A items

• C items: Low-value items that have the simplest controls and minimal records
ABC analysis is based on the Pareto principle, also known as the 80/20 rule, which
states that 80% of a system's outcomes are determined by 20% of its inputs. In
inventory management, this means that roughly 80% of a company's sales come from
20% of its products.

ABC analysis can help businesses:

• Improve inventory optimization

By organizing inventory by revenue and importance, businesses can ensure they invest
in the right products and prioritize warehouse space

• Schedule cycle counts

By ensuring more frequent counts of high-volume items, businesses can ensure their
inventory records are accurate

• Determine inventory rules

By analyzing each category, businesses can determine appropriate service levels, safety
stock levels, and re-ordering parameters

To perform an ABC analysis, you can:

1. Gather all inventory data

2. Calculate the total value of each item

3. Calculate the total value of your inventory

4. Calculate the percentage of value each inventory item offers

5. Classify your ABC inventory

6. Schedule follow-up activities

What is ABC Analysis?

ABC Analysis classifies inventory items into three categories based on their value and
importance to the business: A (high-value items), B (medium-value items), and C (low-
value items).

The A items — typically the most expensive and most important — should be managed
with extra care and attention. The B items are also important for the business’s success,
but not as much as A. The C items are not as important for the business’s success.

Advantages of ABC Analysis

• It allows businesses to focus attention on the most important items. By focusing

on A items, businesses can ensure that they are properly managed and stocked.
This helps to ensure that the business has the items it needs when it needs
them.

• It helps businesses save money. By focusing on the A items, businesses can save
money by not wasting resources on managing and stocking unimportant items.
 • ABC analysis provides businesses with greater control over their inventory. By
focusing on the A items, businesses can better manage their inventory levels and
avoid stock outs.

• It helps businesses make better decisions. By understanding which items are

more important, businesses can make better decisions about which items to
stock and how to manage them.

Examples of ABC Analysis in Inventory Management

ABC Analysis can be used in a variety of ways in inventory management.

For example, it can be used to prioritize inventory items for ordering. By focusing on the
A items, businesses can ensure that they are always stocked and available. This helps
to reduce stock outs and improve customer satisfaction.

ABC Analysis can also be used to prioritize inventory items for reordering. By focusing
on the A items, businesses can ensure that they are always stocked and that their stock
levels are not too low. This helps to reduce the risk of stock outs and improve customer
satisfaction.

ABC Analysis can also be used to prioritize inventory items for replenishment.

4 Steps To Implement ABC Analysis

The four steps to successful ABC analysis are:

Gather Data:

The data to be analyzed should include the sales history, inventory levels, and cost of
the items. This information will be used to determine which items are the most
important.

Calculate the ABC Coefficients:

This is done by dividing the sales of each item by the total sales for the period being
analyzed.

Classify the Items:

Items with the highest coefficients will be classified as “A” items, items with the next
highest coefficients will be classified as “B” items, and items with the lowest
coefficients will be classified as “C” items.

Implement Controls:

The “A” items should be monitored closely and managed carefully, the “B” items should
be monitored and managed on a regular basis, and the “C” items should be monitored
periodically.

Challenges in Using ABC Analysis

Most common challenges while using ABC Analysis are as follows:

Difficult to Implement:
The process requires detailed data on the items being analyzed, and it can be time-
consuming to gather and analyze the data. Additionally, it can be difficult to determine
which items should be classified as “A”, “B”, or “C”.

Doesn’t Consider Demand Patterns:

This means that items may be classified as “A” even if they do not have high demand.
This can lead to inefficient inventory management and missed sales opportunities.

Seasonal Demand:

One of the main limitations of ABC Analysis is that it does not take into account
seasonal demand. This means that items may be classified as “A” even if they only have
high demand during certain times of the year. This can lead to inefficient inventory
management and missed sales opportunities.

Lead Times:

This means that items may be classified as “A” even if they have long lead times. This
can lead to inefficient inventory management and missed sales opportunities.

Conclusion

ABC Analysis is a useful tool in inventory management that can help businesses better
manage their inventory levels and make better decisions about which items to stock
and how to manage them. It helps businesses save money by focusing on the A items
and avoiding unnecessary stocking and managing of unimportant items. It also helps
businesses prioritize their inventory items for ordering, reordering, and replenishment.
However, it can present some challenges, such as difficulty in accurately classifying
items into the ABC categories, difficulty in obtaining accurate and up-to-date data on
the items, and difficulty in determining the exact inventory levels that are needed for the
A, B, and C items.

By understanding how ABC Analysis works and using best practices, businesses can
use it to improve their inventory management processes and ensure that their inventory
levels are always managed properly.
Wilson model for inventory management: known constant demand

Let’s make some assumptions about sales volumes and problems getting supplies of
an item in constant demand which is obtained from a supplier.

Supposing that:

• The unit price is known, constant over time and unaffected by the quantity
purchased.

• The order is always delivered in the same manner.

• Any quantity can be ordered.

• Reorder time (interval between issuing order and delivery of goods) is known and
constant.

• Demand is constant (d) over time and the sale price is constant over time.

• We want to meet all customer demand promptly remembering that the cost of
running out of stock is very high.

• The item in question is not perishable.

• Holding costs are proportional only to the value of the items and the storage
period.

These assumptions, being the basis of the so-called “Wilson model” have the
following consequences:

• The quantity to be purchased in each order is constant.

• The interval between two successive orders is constant.

• It is advisable to place an order so that when each batch arrives there is no stock
remaining.

• The only costs affecting the decision about the quantity to purchase and the
interval between orders are the costs related to ordering and holding.

The only problem you will have to face when managing this situation is deciding
whether to place fewer orders of large quantities or more orders of small
quantities. The solution depends entirely on the costs related to holding and ordering.
If you want to reduce storage costs to a minimum, you need to look at automated
storage solutions which are designed to make the most of available vertical space,
such as automated vertical warehouses.
This is because this type of warehouse will allow you to reduce to practically zero the
cost of moving the products around, maintaining enough space as if in a traditional
warehouse and keeping the products in good condition.

Economic order, rotation time, order point

The question is: “Do I order larger quantities in a small number of orders or small
quantities in many orders?“.
The Wilson model states that the only thing that matters here is the cost of
ordering (which increases along with the number of orders) and the cost of
holding (which increases along with the number of delivered lots and decreasing
number of orders). This is therefore about expressing an objective function and
understanding at what value per lot the total cost of ordering and holding is minimised.

Once this quantity has been established, you can also automatically determine
rotation time and how many orders to place throughout the year. The last thing to
ascertain is the right moment to issue the various orders and therefore the order point.

In the Wilson model, since you don’t want to have any stock left when a new
batch arrives from the supplier, the order point is equal to the amount used during
the lead time required by the supplier to replenish the stock.

Variants to the Wilson model

Moving away from the assumptions contained in the Wilson model, let’s no longer
assume that demand is constant over time and instead accept that there is some
random variability. This means that some demand figures are known along with how
likely they are to occur, respectively.

In these scenarios, we can no longer think about managing supply by issuing orders for
constant quantities at constant intervals, but we have to choose between:

• Management by order point which means reordering constant quantities each

time available stocks reach the order point.

• Management by periodic reordering which means reordering variable

quantities at fixed intervals.

In both these cases it is no longer possible to be certain of meeting all levels of demand,
but it is possible to imagine meeting demand with a certain degree of probability. How?
Supposing that this random variability in demand, and in particular in demand during
reorder time (supplier lead time) is a “Gaussian” distribution.

The “Gaussian” (or “normal”) distribution is where a normal random variable has a high
probability of convergence with values close to the variable’s mean value and this
probability is reduced slowly as it moves away from this value. The “Gaussian”
distribution is suited to describing many random phenomena of definite interest such
as is the case with sales of a certain product within a certain period.

The Wilson Model, also known as the EOQ (Economic Order Quantity) system, is
a very widely used stock management method to reduce inventory costs in a
warehouse.

It is one of the simplest stock management models to implement, which is why it is

so widely used. It focuses on calculating the appropriate quantity of each product or
raw material order of a company to reduce its inventory costs to a minimum.

We will look at this method below, breaking down its characteristics, advantages,
disadvantages and applications:
What is the Wilson method or EOQ (Economic Order Quantity) system and when
does it apply?

This model became popular in 1934 with the publication of an article by R.H. Wilson,
after whom the model is named, but it was developed originally by the engineer Ford
Whitman Harris when he worked in the company Westinghouse Corporation.

The method was created with the clear objective of systematising the goods that are
periodically held in the warehouse and defining the quantity and date on which orders
must be placed with suppliers.

Although this system is commonly used to systematise the purchase of raw

materials, it is applicable to optimising the purchase of any product required by the
company provided purchasing costs can be determined in order and storage terms.

The method is simple and based on a formula that helps to determine when and in what
quantity company orders must be placed, taking into account demand and the
company’s minimum safety stock.

To develop the model and calculation correctly, full knowledge is required of the
company’s logistics processes and the various stages of the supply chain and
decision-making process.

Basic assumptions of the Wilson model

To develop the EOQ method, the following basic conditions or assumptions must be
fulfilled in the company, otherwise the calculations cannot be made accurately:

• It is based on the assumption that the company’s demand is known and is

independent and without major fluctuations during the year, so is
therefore constant.

• The unit cost of each product or purchase must also fulfil these conditions,
being known and fixed throughout the year. It is not valid therefore for seasonal
products.

• Storage costs are also known and depend on the level of stock.

• Potential purchase or order volume discounts are not considered.

• The supplier’s supply and loading times are also considered constant and are
known.

• It is assumed that there is no stock depletion and that at any time any
product quantity can be requested from the supplier.
Economic Order Quantity Formula (Wilson Model)

To calculate the model formula, the following terms must be determined:

• Q: Optimum quantity of each order

• K: Cost of each order

• D: Annual product or raw material demand

• G: Storage cost of each unit

With these terms present, we arrive at the simplified formula that defines the optimum
quantity for each company order (Q):

Practical example of the EOQ model (Economic Order Quantity)

Applying the above theoretical formula to a practical example, let us assume that
the fictitious company Sillas Grandes World SL distributes office chairs in its country
and wants to know the optimum product quantity that it should place in its orders.

If this company has an annual demand of 6,000 chairs (D), the cost of each order or
purchase, with all the resulting expenses (K), is €300, and the annual storage cost of
each chair (G) is €5, what would be the optimum quantity of each order (Q)?

Following this formula, the optimum quantity for the company Sillas Grandes World SL
would be 848.52 units for each order placed, so it would have to place 7.07 orders per
year.

With these results, and following the Wilson or EOQ method, the company would
achieve an optimum inventory level throughout its warehouse without incurring any
excess stock or stock depletion.

Advantages of the Economic Order Quantity Method (EOQ)

The Wilson or EOQ method is widely used internationally for its advantages over other
types of methods.

The main benefits of this system can be summarised as follows:

• Ease and simplicity of use compared to other types of similar models.

• The EOQ method helps optimise storage and purchasing costs.

• It helps to avoid overstock situations in the warehouse.

• Defining the correct product quantity to be acquired helps to avoid stock

depletion.

• The EOQ (Economic Order Quantity) model has widely demonstrated results in
situations that fulfil the aforementioned assumptions.
Disadvantages of the EOQ or Wilson method

The main disadvantages of the Wilson model or EOQ system lie in the same above-
considered assumptions, as they limit its application and make the model less
practical for real situations with non-constant terms.

The main disadvantages of the model in detail are:

• The assumptions make the model impractical or not realistic for many
companies due to its characteristics. The constant demand assumption means
that the EOQ model is not useful for companies with seasonal, one-off or
irregular demands, or may lead to errors in case of a drastic change in the
customer’s habits.

• The fact that purchase volume discounts are not considered leaves a very
relevant variable out of the equation which may offset storage costs.

• The assumption of immediacy in the replenishment of inventory is not entirely

realistic either, and without considering this variable there may be stock
depletion situations that will need to be carefully considered when developing
the model.
Material Requirement Planning (MRP)

Material requirements planning (MRP) is a system that helps manufacturers plan

production, schedule tasks, and manage inventory. It's used to ensure that the right
materials are available when needed to meet production demands.

Material requirements planning (MRP) is a system for calculating the materials and
components needed to manufacture a product. It consists of three primary steps:
taking inventory of the materials and components on hand, identifying which additional
ones are needed and then scheduling their production or purchase.

MRP systems can be software-based or conducted manually. The process typically

involves the following steps:

• Inventory: Take stock of the materials and components on hand

• Identify needs: Determine which additional materials are required

• Schedule: Schedule the production or purchase of the needed materials

MRP helps manufacturers achieve several objectives, including:

• Inventory levels: Maintaining low inventory levels

• Production: Planning manufacturing activities

• Delivery: Planning delivery schedules

• Purchasing: Planning purchasing activities

MRP can help manufacturers:

• Improve efficiency, flexibility, and profitability

• Increase productivity of factory workers

• Improve product quality

• Minimize material and labor costs

• Respond more quickly to increased demand

• Avoid production delays and inventory stockouts

MRP was first computerized in the 1950s by aero-engine makers associated with
General Electric and Rolls Royce. It's now one of the most commonly used inventory
management systems in the world.
UNIT-4 Production Planning & Control (PPC)

1.Types and examples of Production (PPC) Need and importance,

Functions & General Approach for each type of production.
2. Gantt Chart – Format & Method to prepare
3. Critical Ratio scheduling method and numerical examples.
4. Bottlenecking meaning effects and ways to reduce.

Types and examples of Production (PPC) Need and importance,

Functions & General Approach for each type of production.
Production Planning and Control (PPC) is a management system that helps businesses
plan, manage, and control their production processes. PPC helps organizations:

• Allocate resources like raw materials, machinery, and human resources

• Maximize output to meet customer needs

• Create a roadmap for the entire production process

Some types of production include:

• Mass production

A technique for producing large quantities of the same item in a short time. Mass
production is often automated, which reduces labor costs.

• Batch production

A method for manufacturing goods in groups, rather than individually or

continuously. Batch production is useful for large-scale production.

• Flow method

A production method that can help manufacturers reduce costs, manufacturing lead
times, and the number of items in inventory.

• Service production

A production method that involves rendering services, such as technical support or

delivery services.

The general approach for each type of production involves:

• Planning: Determining when, how much, where, and in what order to produce

• Control: Checking operations to ensure that everything goes as planned

• Follow up: Systematically checking production activities to ensure that

production is carried out according to plan
An organization is simply a result of many departments & functions working in sync
toward a singular goal. And, for such robustness, every enterprise relies on a thorough
action plan. In the context of a supply chain industry, this covers the entire functioning
from production to delivery. Such astute strategies help a company be entirely in
command of the tasks undertaken while also maintaining its competitive edge in the
industry.

One such integral aspect of a supply chain is PPC, abbreviated for Production Planning
and Control. A self-explanatory term, the production planning and control process
covers all the essential aspects of manufacturing. This includes a complete top-to-
bottom approach from ordering material to scheduling the workforce, accounting for
the machines involved, and distributing the product to the end customer. The entire
function of the PPC ensures that a company’s resources can rely on each other with
complete transparency during planning and control. In this write-up, we will focus on
the essential functions of production planning and control (PPC), which ultimately drive
the product’s life cycle.

What Are the Functions of Production Planning and Control?

The listed pointers of PPC all contribute towards making a production chain efficient
while keeping the company on a revenue-generating path. These core functionalities
need to work in an optimized manner to ensure that there are no last-minute errors in
the end-to-end process.

1. Material Management:One key aspect of PPC is deciding on the quantity of raw

material required in conjunction with the production timeline. Finalizing the
material quota helps a company reduce wastage, minimize inventory fallacy, and
cut down on costs related to resources & workforce involved. Handling material
management directly correlates with enterprises never running out of stock and
subsequently enabling other factions of the supply chain to work fluently.

2. Equipment:It’s one thing having an infrastructure but another to warrant that

your equipment complies with your daily production scale. This step includes
analyzing equipment downtime issues so that the company prepares itself for
any potential bottlenecks during manufacturing. An enterprise keeping a tab on
regular maintenance of its machines keeps them safeguarded against any
unwarranted breakdown which might halt the usual workflow of their operation.
The safety & upkeeping of the machinery involved guarantees rewarding output.

3. Production Method:Citing the resources available to a company, from the

workforce to the economy of its daily proceedings, an organization should
choose the best method suited to its revenue. When finalizing a production
blueprint, management should look for a flexible application that is robust in the
face of varied customer demands and can overcome the constraints without any
effect on the other cyclic tasks. Implementing production planning and
scheduling software can minimize the efforts by enabling cooperation amongst
stakeholders & supply chain processes.

4. Manufacturing Routing:Akin to the production method, manufacturing routing

ensures that the raw material gets shaped into finished goods without any
 wastage, improper utilization of resources, or any excessive steps leading to an
elongated timeline. In simplistic definition, routing's essential goal is finalizing
unprocessed material into a final product with negligible to zero interruptions.

5. Time Estimation:Which process is taking how long forms the crux of the end-to-
end supply chain functioning. While quantifying the efficacy of any operation
involved, management has to look at the duration estimated in context with the
actual timeline utilized to determine the effectiveness of the manufacturing
procedure. A company conducts extensive analysis to establish key markers to
gauge the methods' contribution.

6. Evaluation:The subsequent stage in the functions of production planning and

control is evaluation. This action grades the productivity metric of the
manufacturing function & cites the areas of improvement, if any. Timely
evaluation helps a company establish an efficient framework & be proactive in
its production chain.

Apart from the usual functions of PPC, a few other measures are taken into account to
bookend a comprehensive process. The coined mechanism is Corrective action, which
involves Expediting & Replanning.

7. Expediting:This step refers to the operational data collection, which is then

compared to the ideated manufacturing plan. If any deviations are recorded,
corrective measures are taken into account to get back to the outline, which
benefits the organization.

8. Replanning:Replanning, in simple layperson's terms, can be defined as a backup

plan for expediting; if in case the plan suggested to correct the deviation is not
practical, then whole replanning is required to avoid all the critical errors which
were found during the application of the primary planning.

Gantt Chart – Format & Method to prepare

A Gantt chart is a visual representation of a project's tasks and schedule, and it's
typically formatted with tasks listed vertically and a timeline across the top. The chart
includes horizontal bars, called Gantt bars, that show the start and end dates, duration,
and progress of each task.

Here are some tips for creating a Gantt chart:

• Prepare data

List tasks in a spreadsheet with their start and end dates. You can also include other
information like task status, priority, progress, milestones, and dependencies.

• Create the chart

In Excel, you can create a stacked bar chart based on the start dates, then add a new
data series for task durations. You can also customize the chart's appearance with
colors, borders, and intervals.

• Use an early start time approach

This method schedules each task to start as soon as its prerequisites are complete. It
maximizes the float time available for all tasks.

Here are some steps you can take to prepare a Gantt chart:

1. Review the scope baseline

2. Create activities

3. Sequence activities

4. Estimate resources

5. Estimate durations

6. Develop a schedule

Critical Ratio scheduling method and numerical examples

Critical Ratio(CR)

Critical Ratio is an index number computed by dividing the time remaining until due
date by the work time remaining. As opposed to priority rules, critical ratio is dynamic
and
easily updated. It tends to perform better than FCFS, EDD, SPT, and LPT on the
average
job lateness(delays) criterion. The critical ratio gives priority to jobs that must be done
to
keep shipping on schedule. It is used in conjuction with MRP systems and has broad
industrial application. The critical ratio is measure of urgency of any order compared
to the
other orders for the same facility. The ratio is based on when the completed order is
required and how much time is required to complete.

The step for using this rule are:

At the starting program, user input the numbers of job, the jobs name, the works day
remaining and the due date of each job and as well the today's date.

The today's date and the number of job are just inputted once time. Then, the others
are followed the value of the number of jobs inputted.

The formula for Critical Ratio is:

CR = time remaining / works day remaining
 After calculating the CR for each job, give the priority order by using the value of
the calculated critical ratio. The priority order is performed from smaller to larger.

Bottlenecking meaning effects and ways to reduce

A bottleneck is a situation where work is delayed in a process, which can have a

number of effects on a business:

• Reduced production capacity

Bottlenecks can significantly reduce a company's ability to produce, which can lead
to late deliveries and unhappy customers.

• Excess inventory

Work-in-progress inventory can accumulate before a bottleneck, which can lead to

increased storage costs.

• Downtime

Idling at a bottleneck can lead to a large percentage of downtime or loss of

productivity.

Here are some ways to reduce bottlenecks:

• Plan ahead: Plan well and communicate effectively.

• Use the right tools: Use the right tools for the job.

• Manage collaboration: Manage any collaboration issues within the team.

• Minimize downtime: Avoid scheduled and unscheduled downtime.

• Process work in batches: Organize similar work items in batches.

• Add more people and resources: Temporarily assign more people or

resources to get things moving.

• Be flexible: Review the current state as often as possible and start resolving
the problem as soon as possible.