Production and Operations Management

Module-04
Introduction to material handling
• Materials management is a function, which aims for integrated
approach towards the management of materials in an industrial
undertaking.
• Its main objective is cost reduction and efficient handling of
materials at all stages and in all sections of the undertaking.
• Its function includes several important aspects connected with
material, such as, purchasing, storage, inventory control, material
handling, standardisation etc.
Principles of material handling

Planning Standardization Work Unit Load

Space
Automation Environment Life-Cycle Cost
Utilization
Principles of material handling
• Planning : The planning principle involves identifying the
materials that need to be moved, determining the best way to
move them, and ensuring that the process is safe and efficient.
When using the planning principle to assess a material handling
task, ask yourself the following questions:
• What materials need to be moved?
• What is the best way to move the materials?
• How can the process be made safer and more efficient?
Principles of material handling
• Standardization: The standardization principle involves using
the same processes and material handling equipment for similar
tasks to reduce variability and improve efficiency. When
considering standardization, ask yourself:
• Are there any similar tasks that can use the same processes and
material handling equipment?
• Can standardization reduce variability and improve efficiency?
Principles of material handling
• Work: This involves minimizing the amount of physical work
required within material handling systems to move materials by
using equipment and automation, rather than pushing the limits
of human capabilities. When considering the work principle, ask
yourself:
• Can equipment or automation reduce the physical work
required?
• How can the process be made less physically demanding?
• Reducing manual handling helps to protect the workforce,
keeping them safe, & empowers them to be more efficient.
Principles of material handling
• Unit Load: Looking at Unit loads involves consolidating
materials into a single load for more efficient movement, to
maximize physical material flow. When considering the unit load
principle, ask yourself:
• Can materials be consolidated into a single load?
• Can unit loads be standardized for more efficient movement?
Principles of material handling
• Space Utilization: The Space Utilization principle involves
maximizing the use of available space for handling and storage
activities. Warehouse space is often costly, including the cost of
manpower - and the same is true in manufacturing environments.
When considering space utilization, ask yourself:
• Can the available space be better utilized for storage and
movement?
• How can the available space be maximized for material
handling?
Principles of material handling
• Automation: The Automation principle involves using
technology to automate material movement for improved
efficiency and safety. When considering automation in material
handling systems, ask yourself:
• Can technology be used to automate material handling
processes?
• How can automation improve efficiency and safety?
Principles of material handling
• Environment: This involves considering the impact of material
handling processes and material handling systems on the
environment and taking steps to reduce waste and improve
sustainability. When considering the environment, ask yourself:
• What is the impact of a material handling process on the
environment?
• How can material handling systems be made more sustainable?
• Example: Using a battery powered vehicle instead of a vehicle
running on diesel.
Principles of material handling
• Life Cycle Cost: The Life Cycle Cost principle involves considering
the total cost of material handling processes, including material
handling equipment and time to run them. When considering the
entire life cycle cost of material movement processes, ask yourself:
• What is the total cost of material handling processes over the life of the
equipment and processes?
• How can cost be reduced through better equipment and process
selection?
• Sacrificing productivity by not investing in the right equipment and
processes will only have a negative impact ultimately.
Inventory management
• Inventory generally refers to the materials in stock. It is also called the idle
resource of an enterprise.
• Inventories represent those items which are either stocked for sale or they
are in the process of manufacturing, or they are in the form of materials,
which are yet to be utilized.
• The interval between receiving the purchased parts and transforming them
into final products varies from industries to industries depending upon the
cycle time of manufacture.
• It is, therefore, necessary to hold inventories of various kinds to act as a
buffer between supply and demand for efficient operation of the system.
• Thus, an effective control on inventory is a must for smooth and efficient
running of the production cycle with least interruptions.
Objectives of inventory management
• To ensure adequate supply of products to customer and avoid shortages as
far as possible.
• To make sure that the financial investment in inventories is minimum (i.e., to
see that the working capital is blocked to the minimum possible extent).
• Efficient purchasing, storing, consumption and accounting for materials is an
important objective.
• To maintain timely record of inventories of all the items and to maintain the
stock within the desired limits.
• To ensure timely action for replenishment.
• To provide a reserve stock for variations in lead times of delivery of materials.
• To provide a scientific base for both short-term and long-term planning of
materials.
Benefits of inventory management
• It is an established fact that through the practice of scientific
inventory control, following are the benefits of inventory control:
• Improvement in customer’s relationship because of the timely
delivery of goods and service.
• Smooth and uninterrupted production and, hence, no stock out.
• Efficient utilization of working capital.
• Economy in purchasing.
• Eliminates the possibility of duplicate ordering.
Inventory management techniques

Inventory
Management
Techniques

Economic
Just in Time Always Better
Order Quantity
(JIT) Control (ABC)
(EOQ)
Just in time
• JIT or Just in Time is defined as a philosophy of manufacturing based on
planned elimination of waste and continuous improvement of productivity.
• It encompasses the successful execution of all manufacturing activities
required to produce a final product, from design engineering to delivery and
including all stages of conversion of raw material into finished product.
• The primary element of JIT are to have only the required
inventory when needed, to improve quality to zero defects, to
reduce lead times by reducing set-up times, queue lengths and lot
sizes, and accomplish these things at minimum cost.
• With JIT, supplies and components are “pulled” through a system where they
are needed and when they are needed.
• When good units do not arrive on time (just as needed), a problem has been
identified.
Importance of JIT system
• It decreases the order-to-delivery time (the time period between
the moment that customer places and order and until the
customer receives the order) drastically.
• It helps in its philosophy utilizing the full capability of the worker.
Workers in the JIT system are given the responsibility of
producing quality parts.
• It results in better supplier relationships and better customer
relationships.
• It helps in enhancing the capabilities of workers, production
system and all its associated elements.
Little JIT & Big JIT
• Little JIT is a form of production scheduling and inventory
management whereby products are produced only to need actual
demand, and materials for each stage of production are received or
produced “Just in Time” for use in the next stage of production or for
delivery to a customer
• Big JIT encompasses the full range of organization and operational
improvement practices by many Japanese companies (i.e., the entire
way products are designed, work is organized, and responsibilities are
assigned) and is also called Japanese Production or lean production.
• Big JIT is the philosophy of operation management that seeks to
eliminate waste in all aspects of a firm’s production activities, human
relations, vendor relations, technology and the management of
materials and inventories.
Characteristics of JIT

Continuous Reliable Short lot Eliminate

flow suppliers sizes waste

Reduce Improve Respond to

costs quality demand
Characteristics of JIT

• Continuous flow: Items flow continuously from suppliers to

production
• Reliable suppliers: Suppliers are dependable and deliver
materials on time
• Short lot sizes: Small lot sizes reduce cycle time and inventory
• Eliminate waste: JIT helps eliminate unnecessary processes and
wasted efforts
Con…
• Reduce costs: JIT reduces inventory costs and production costs
• Improve quality: JIT aims for high quality products with fewer
defects
• Respond to demand: JIT helps businesses respond quickly to
market demands
ABC analysis
• ABC analysis is also known as Always Better Control.
• The objective of ABC analysis is to maintain appropriate control of
inventory based on the potential savings associated with a proper level
of such control.
• The ABC approach is a means of categorizing inventory items into three
classes ‘A’,’B’,’C’ according to the potential amount to be controlled.
• Once the inventory is classified, we have a firm base for deciding where
we will put our effort.
• Logically, we will keep a strong control on ‘A’ items, and keep the
inventory levels at the lowest possible levels consistent with meeting
demands & we will keep a strong inventory of ‘C’ items, with a month of
supply etc.
Procedure for developing ABC Analysis
• The following procedure is suggested for developing an ABC analysis:
1. List each item carried in inventory by number or some other criteria.
2. Determine the annual volume of usage and the Rupee value of each
item.
3. Multiply each item’s annual volume usage by its rupee value.
4. Compute each item’s percentage of the total inventory in terms of
annual usage in rupees.
5. Select top 10-20% of all items, which have the highest rupee
percentages and classify them as ‘A’ items.
6. Select the next 20-30% of all items, which have the next highest
rupee percentages and designate them ‘B’ items.
7. Select the next 60-70% of all items, which have the lowest rupee
percentages are ‘C’ items.
Abc analysis graph
Abc analysis guidelines
A Items B Items C Items
Very Strict control Moderate control Loose control
No or very low safety stocks Low safety stocks High safety stocks
Frequent ordering or weekly Once in 3 months Bulk ordering once in 6 months
deliveries
Maximum follow-up Periodic follow-up Follow-up in exceptional cases
Rigorous value analysis Moderate value analysis Minimum value analysis
Ordering from as many sources as Ordering from two or more Two sources from each item
possible reliable sources
Centralized purchasing & storage Combination of centralized and Decentralized purchasing
decentralized purchasing
To be handled by senior officers To be handled by middle To be handled by lower
management management or entirely delegated
to them
EOQ (Economic Order Quantity) Analysis
• Maintaining Inventory is a complex as well as expensive task. It involves
various types of costs and hence need to be taken care of in a proper way.
• In order to keep a balance between inventory associated costs and keeping
the production process running smoothly, we need to find an optimal point
or the optimal order size.
• Economic Order Quantity is the order size at which the total cost, comprising
ordering and plus carrying cost is the least.
• This is because if we purchase in the larger quantities, it results in high
carrying (inventory holding) cost. If we purchase in small quantities, it
increases the order cost, as we will have to inventory order frequently.
• Hence it is imperative to balance ordering cost and carrying cost. This
balance can be achieved through Economic Order Quantity.
EOQ Analysis
• Recall, that the cost of inventory
management is ordering costs as well as
the inventory holding costs.
• Inventory holding costs have a direct
relationship with the level of the
inventory.
• At the same time, the ordering costs
keeps decreasing as we order more and
more units per order.
• The total cost is the combination of both
and hence takes the U-Shape.
Assumption of EOQ analysis
• The assumptions of EOQ analysis is as follows:
1. Demand for the product is constant and uniform throughout the
period.
2. Lead time (time from ordering to receiving the order) is constant.
3. Price per unit of product is constant.
4. Inventory holding cost is based on average inventory.
5. Ordering costs are constant, and
6. All demands for the product will be satisfied in its entirety.
Limitations of EOQ

Conflicting
Faulty Basic Costly Nature of
Information Calculations Inventory
Management
Limitations of EOQ
• Faulty Basic Information: EOQ Calculations are only as accurate as the order
cost and carrying cost information in which they are based. It is no easy job to
calculate order costs. In practice, order cost varies from commodity to commodity
and opportunity cost can vary with the company’s opportunity cost of capital.
• Costly Calculations: It is not easy job to estimate cost of acquisition and cost of
possession accurately. Actual calculation of EOQ can be time-consuming even when
the simple formula for steady usage are used. In many cases, the cost of estimating
acquisition and possession exceeds the savings that can be made.
• Conflicting Nature of Inventory Management: Sometimes, Inventory
management becomes complex because of various conflicts. They are:
▫ Products whose shelf life is small is restricted from EOQ Calculations,
▫ Products which face a seasonal demand, and unusual sales are also complex to enter the
same.
▫ Items subject to rapid product development are also complex to integrate into EOQ
systems.
Example:
• A company uses 10,000 units of a product annually.
• The ordering cost per order is ₹500, and the holding cost
per unit per year is ₹2.
• Lead Time (L) = 5 days
• Working Days in a Year = 250 days
• Find the EOQ.
Calculation
• Daily Demand (d) = D / Working Days = 10,000 / 250 = 40 units per day
Con…

•Order Quantity (EOQ): 2,236 units

•When to Place an Order (ROP): When inventory falls to 200 units

So, the company should place an order for 2,236 units whenever the inventory level reaches
200 units.
Concept of HML method of inventory management
• HML analysis is a tool used in inventory management to help classify
inventory items and inventory control.
• HML analysis is an inventory method that categorizes inventory based
on a product’s unit price. This method classifies inventory into the
following categories:
• (H) High Cost: Includes high unit value/cost products. Normally they
are 10-15% of the total items.
• (M) Medium Cost: Includes average or medium unit value items. 20-
25% of products fall into this category.
• (L) Low Cost: Includes items with low unit value. 60-70% of the
products are usually low-cost.
Concept of VED method of inventory management
• While in ABC, inventory are classified on the basis of their
consumption value and in HML analysis the unit value is the basis, in
VED analysis we will decide the classification of inventories on the
basis of inventories being VITAL, ESSENTIAL & DESIRABLE
categorization.
• The VED analysis is done to determine the criticality of an item and its
effect on production and other services. It is specially used for
classification of spare parts.
• If a part is vital, it is given V classification, if it is essential, then it is
given E classification and if it is not so essential it is given D
classification.
Thank You