INVENTORY MANAGEMENT

AND ANALYSIS
UNIT 3
INVENTORY
• The term 'inventory' has been defined by many authors.

• According to B.D. Khare, "The term inventory' includes materials- raw, in process, finished
packaging, spares and others stocked in order to meet an unexpected demand or distribution in
future".

• Another definition of inventory given by C. Paul Jannis is as under. "Inventory can be used to refer
to the stock on hand at a particular time of raw materials, goods in process of manufacture, finished
products, merchandise purchased for resale, and the like, tangible assets which can be seen,
measured and counted. In connection with financial statements and accounting records, the
reference may be to the amount assigned to stock of goods owned by an enterprise at a particular
time".
Objectives of Inventories
• The inventory is maintained by organisations to avoid the stock out of an item. A stock out is
undesirable for manufacture because it halts the production process. The raw materials inventories
are held for conversion into semi-finished or finished goods. Similarly, there is need for finished
goods inventory because manufacturing process always takes time. However, the nature of the
product, nature of customer demand and the nature of the production process determine the need
for finished goods inventories. Following are the objectives of holding inventories.
1. Inventories serve the purpose of procurement of raw-materials in economic lot
2. Another purpose of holding inventories is to reduce material handling costs. In some organisations,
material handling cost can be reduced by accumulating parts between the processes.
3. Inventories facilitate reasonable utilization of people and equipments. 4. Inventories are held to
facilitate display and service to customers.
TYPES OF INVENTORY
1. Raw Material Inventory:
• Raw materials are the basic materials that a manufacturing company buys
from its suppliers. The former uses them to convert them into the final
products by applying manufacturing processes. For example, aluminum scrap
is the raw material for a company that produces aluminum ingots. Flour is the
raw material for a company that produces bread or pizza. Similarly, metal
parts and ingots are the raw materials bought by a company that
manufactures cars, and crude oil is the raw material for an oil refinery.

• It is prevalent and easy to observe that the final products of one company are
bought as raw materials for some other company. For instance, many oil
drilling companies produce crude oil as their final product. But on the other
hand, the same crude oil is bought by oil refining companies as raw materials
to manufacture their final products, i.e., gasoline, kerosene, paraffin, etc.
 Work in Progress (WIP) Inventory

• Work in progress inventory can also be called semi-finished goods. They are the raw materials that have been taken
out of the raw materials store and are now undergoing the process of their conversion into the final products. So
these are the partly processed raw materials lying on the production floor. And they have also not reached the stage
where they have been converted into the final product.

• The extent of inventory locked up as work in progress is lower, the better. It is understandable as the inventory
under process is of no use till it gets converted into the final product. It may be saleable at some price, but it cannot
be sold to generate any revenue for the company’s core business. In fact, in lean manufacturing systems, the
work-in-progress inventory is considered waste.

• So it is most desirable that the volume of inventory lying in the form of work in progress be minimized. The time
taken to convert it into the final is also minimized so that the locked-up value can be released as quickly as possible.
The idea is that this capital, which is locked up in the form of work-in-progress inventory, can otherwise be invested
somewhere else to achieve much better returns.
Finished Goods Inventory:

• Finished goods are the final products obtained after applying the manufacturing processes to the
raw materials and the semi-finished goods discussed above in the article. They are saleable, and
their sale contributes fully to the revenue from the company’s core operations.

• Regarding the level of finished goods inventory, we need to look at two types of industries. First, we
would take the industries in which the finished goods are mass-produced, and the sale happens
after the production. Examples of such industries are the FMCG
• industry and the oil industry. For a company in such an industry, the correct approach is to
maintain the finished goods inventory similarly to the raw material inventory maintained, i.e., at an
optimized level per the demand in the market.
 Functions of Inventory
• In any organisation, inventories add an operating flexibility that would otherwise be lost. In production, work in
progress, inventories are an absolute necessity unless each indidual part is to be carried from machine to machine
and these machines set up to produce that single part. The main functions that inventory performs are as follows:
1. Regularising demand and supply-Inventory regularises the demand and supply. For example, harvest of tobacco is
carried out during the summer, but the manufacturer of tobacco products such as cigarettes and cigars continues
throughout the entire year. In such cases, sufficient raw materials must be purchased in advance. It compels the
producer to carry inventory.
2. Economising purchases-If the product does not have the demand sufficient to sustain its continuous production
round the year, it is usually produced in batches or lots on an intermittent basis. When the item is not being produced,
sales are made from inventory. An organisation purchases in larger quantities of inventory to get quntity discount.
3. Coping with perishable materials-Organisation is selling canned foods, particularly fruits and vegetables, operate at
peak production capacity only for a few months each year. They must store up inventory to supply sufficient to last
them throughout a year's anticipated demand untill the next session.
Inventory Costs
• The cost factor must be taken into account In addition to the above, set-up cost in case of
while taking any decision regarding manufacturing, is also taken into account such as:
inventories. Inventory cost includes ordering (1) Cost of setting up the process or machine etc. (11)
costs, carrying cost, out of stock cost and Cost of scrap which may occur at the begining of new
capacity cost. In practice ordering costs and operation
inventory costs are considered for calculating (ii) Cost of planning production and control (iv) Cost
inventory costs. of machine idle time during set-up.
1. Ordering Cost-This cost includes the 2. Carrying Cost-This consist of expenditure made for
expenditure made on : (i) Calling quotations (1) Insurance
(ii) Processing quotations (ii) Storage and handling
(iii) Placing purchase orders (i) Obsolesence and Depreciation
(iv) Receiving and inspecting (iv) Deterioration
(v) Verifying and payment of bill (vi) Other (v) Taxes
incidental charges etc. (vi) Interest etc.
Inventory Management and Control
• Because of high costs involved in inventories, their proper management and control assume considerable
importance. In fact, the management of inventory is given such an importance, that, it is often treated synonymous
with materials management. Literature wise, there are more number of books and articles written on inventory
management than on materials management.
• Inventory management involves the 'development and administration of policies, systems and procedures, which
will minimise total costs relative to inventory decisions and related functions such as customer service
requirements, production scheduling, purchasing and traffic. 'Viewed in that perspective, inventory management is
broad in scope and affects a great number of activities in a company's organisation. Because of these numerous
interrelationships, inventory management stresses the need for integrated information flow and decision making, as
it relates to inventory policies and overall systems.
• Inventory control, on the other hand, is defined in a narrower sense than inventory management and pertains
primarily to the administration of established policies, systems and procedures. For example, the actual steps taken
to maintain the stock levels or stock records refer to inventory control. According to Gordon B. Carson, "Inventory
control refers to the process whereby the investment in materials and parts carried in stock is regulated within
predetermined limits set in accordance with the inventory policy established by management".
 CONT....
• The definition focuses on the following aspects of inventory control.
(a) Inventory control is concerned with the raw materials and purchased parts.
(b) Inventory control regulates the investments in inventories.
(c) The investments are decided on the basis of predetermined limits, and
(d)These limits are prescribed by the inventory policy framed by the
management.
Briefly speaking inventory control involves planning of
i. What to purchase?
ii. How much of the inventory is to be kept or ordered?
iii. When to purchase?
The Need of Inventory Management and Control
• The necessity of inventory control is to maintain a reserve (store) of goods
that will ensure manufacturing according to the production plan based on
sales requirements and at the lowest possible ultimate cost. Losses from
improper inventory control include purchases in excess than what needed,
the cost of slowed up production resulting from material not being available
when wanted. Each time a machine is shut down for lack of materials or each
time sale is postponed or cancelled for lack of finished goods, a factory loses
money.
• To promote smooth factory operation and to prevent idle machine time,
proper quantity of material must be on hand when it is wanted. Proper
inventory control can reduce such losses to a great extent.
Objectives of Inventory Control
• Following are the major objectives of inventory control.
1. To ensure availability of material-The first and foremost objective of inventory control management is to make all types
of materials available at all times whenever it is required by production department. This will ensure manufacturing
according to production plan based on sales requirements. Non-availability of materials may intrupt flow of production for
the want of supply. It is therefore advisable to maintain sufficient stock of essential items to move on the production
schedule.
2. To minimise the wastage -Inventory control aims at minimising the wastage of inventory at all levels, i.e. during its storage
in godown or at workplace in the factory. dirt should be avoided. Abnormal wastage should not be permitted however,
normal or Wastage of material by leakage, theft, embezzlement and spoilage due to dust, rust or controllable wastage
should be kept minimum.
3. To run the stores effectively-This includes stores layout, storing media (bins, shelves, racks, almirah and open space etc.)
utilization of storage space effectively, receiving and using procedures of materials etc. Inventory control facilitates the
above function efficiently to minimise the stroage cost.
4. To maintain optimum levels-The management can procure the inventory in time in order to run the production plan
effectively, if regular and propt information about availability of materials is provided to it. It thus, helps management in
maintaining the inventory at optimum level keeping in view operational requirements. Inventory control avoids the dangers
of stockout.
5. To minimise investment in inventories-Inventory control management keeps down investment
in inventories, inventory carrying costs and obsolesence losses to the minimum. 6. To facilitate
purchasing economies-A proper inventory control brings several
6. To facilitate purchasing economies-A proper inventory control brings several advantages and
economies in purchasing. Management makes every attemp to purchase inventories in bulk to take
the advantage of favourable market conditions. Thus, it facilitates purchasing economies through
the measurement of requirements on the basis of recorded experience.
7. To avoid improper materials handling-Inventory control protects the inventory from losses due
to improper handling of goods and unauthorised removal from stores. It, thus reduces the materials
handling costs.
8. To facilitate cost accounting activities-Inventory control facilitates cost accounting activities by
providing a means for allocating material costs to products. It facilitates pricing of all materials
supplied to production shops so as to estimate materials cost of a product.
9. To promote smooth factory operation-Finally, the basic objective of inventory control is to keep
factory in smooth operation. A factory cannot run smoothly without the availability of materials.
Therefore, proper quantity of material must be on hand to prevent machine idle time.
Advantages of Inventory Control
Proper control of inventories will result in following benefits to an organisation:
1. Inventory control ensures an adequate supply of materials and stores to maintain the flow of production.
2. It minimises stockouts and shortages of materials and avoids interruptions on
3. Inventory control keeps down investment in inventories and inventory carrying operations... costs.
4. It eliminates duplication in ordering stocks by centralising the source from which purchase requisitions are made.
5. Inventory control produces a check against the loss of materials through carelessness or pilferage.
6. It helps in better utilization of stocks by facilitating inter-department within a company.
7. It ensures against delays in deliveries of goods.
8. It allows advantage of quantity discounts.
9. It allows for possible increase in output.
10. It utilizes the benefit of price fluctiations.
11. It facilitates economies in purchases through measurement of requirements.
12. It facilitates cost accounting activities by allocating material costs to products.
Activities/Functions of Inventory Control
• The inventory control is mainly concerned with the following activities:
1. Inventory Planning-On the basis of the production schedules prepared from the sales forecasting in
continuous production and customer orders in intermittent production, the periodic requirements of the
inventories are planned in advance.
2. Inventory procurement-The inventories are procured from the selected suppliers according to the planned
requirements. This is done through the determinations of inventory needs, contacting the suppliers, comparing
their quotations, selecting the suppliers and placing the purchase order with the selected supplier
3. Receiving and inspection-The incoming material are received, verified with purchase order and packing slip
and are inspected to the verification of qulity.
4. Storing and issuing the inventories-As stated above, the inventories are produced in advance of their use.
They are stored till they are requisitioned by the production departments. The stored inventories are issued to
the respected production departments against the authorised material requisitions.
5. Recording the receipts and issues-Inventories are properly recorded in the bin card
and attached to each bin and in the stock ledger. At the end of each transaction, the
entries are made in the receiving or issuing colums and the balance is found.
6. Physical verification of inventories-At the end of specified period, the physical
quantities of the inventories are verified with the book balance and the discrepanciesare
ascertained. The discrepancies are analysed and the reasons for the inventory losses are
found out.
7. Follow-up function-Inventory control also involves the analysis of excessive usage of
the inventories. It tries to find out the reasons for such excessive consumption of raw
materials and stores.
8. Materials standardisation-Inventory control also aims for a cheaper substitute. Value
engineering is a popular control technique which searches for cheaper substitute.
ESSENTIALS OF A GOOD INVENTORY CONTROL
SYSTEM
(1) Classification and Identification of Inventories : The usual inventory of a manufacturing firm includes raw-material,
storm, work-in progress and components etc. To facilitate prompt recording and dealing each item of lithe inventory must be
assigned a particular code no. and it must be classified in suitable groups or sub-divisions. ABC analysis of material is very
helpful in this context.
(2) Standardization and Simplification of Inventories : In order to facilitate inventory control the inventory line should be
simplified. It refers to the elimination of excess types and size of items. Simplification leads to reduction in inventories and its
carrying costs. Standardization, on the other hand, refers to the fixation of standards of raw material to be purchased and
specification of the components and tools to be used.
(3) Setting Maximum and Minimum limits for each part of inventory: The third step in this process is to set the max imam
and minimum limits of each items of the inventory. It avoids the changes of over-investment as well as running shat of any
item during the course of production. Record point should also be fixed before hand.
(4) Economic Order Quantity : It is also a basic inventory problem to determine the EOQ the problem is one to set a balance
between two opportunity costs, namely, ordering cost and carrying costs. The quantity should be fixed beforehand.
(5) Adequate Storage Facilities : To make the system of inventory control successful and efficient one, it is also essential to
provide the adequate storage facilities. Sufficient storage area and proper handling facilities should be organized
(6) Adequate Records and Reports : Inventory control requites the maintenance of adequate inventory records and reports.
Various inventory records must contain information to meet the needs of the purchasing, production, sales and financial
staff. The typical information required about any class of inventory may be relating to quantity on hand, location, quantities
in transit, unit cost, EOQ for each item of inventory, recorder point, safety level, etc. statements forms and inventory records
should be so designed that the clerical cost of maintaining these records must be kept at a minimum.
(7) Intelligent and Experienced Personnel : The last but not the least important requirements of a successful inventory
control system is the appointment of intelligent and experienced employees in purchase department, stores department and
so on. Mere establishment of procedures an(i the maintenance of records would not give the desired results as there is no
substituted for sincere and devoted as well experienced hands. Hence, the whole inventory control structure should be
manned with trained, qualified, experienced and devoted employees. Apart from the above, the other requirements are as
follows
(8) Co-ordination : There must be proper co-ordination of all departments involved—finance, purchasing, receiving testing,
approving, storage, accounting, etc.
(9) Budgeting : An efficient budgeting system is also required. Preparation of budgets concerning materials, supplies and
equipment to ensure economy in purchasing and use of materials is also necessary.
(10) Internal Check : Operation of system of internal check so that all transactions involving materials, supplies and
equipment purchases are properly approved and automatically checked.
FACTORS AFFECTING INVENTORY CONTROL
POLICY
1. Financial Factors -Factors such as the cost of borrowing money to stock enough inventory can greatly
influence inventory management. In this case, your finances may fluctuate according to the economy, and it is
wise to keep an eye on changing interest rates to help plan your spending. The tax costs associated with
stocking inventory is another factor that can influence inventory management. This is especially salient when
preparing for the end of year tax returns. Other financial factors include the expenses associated with
warehouse operations and transportation costs changes in these factors may require you to alter your
inventory management processes accordingly. Fluctuations in the cost of fuel, for example, may require you to
rethink your transportation methods to reduce costs. You may choose to purchase your own trucks or use
outside contractors for transportation, which again will change the way you manage inventory.
2. Suppliers - Suppliers can have a huge influence on inventory control. Successful businesses require reliable
suppliers in order to plan spending and arrange production. An unreliable or unpredictable supplier can have
huge knock-on effects for inventory control. It can be a good idea to ensure you have a reliable back up
supplier to prevent product shortages or delays in the manufacturing process.
3. Lead Time - Lead time is the time it takes from the moment an item is ordered to the moment it arrives.
Lead time will vary widely depending on the product type and the various manufacturing processes involved,
and therefore changes in these factors can require changes to inventory management. Outsourcing
manufacturing processes to other countries due to lower production costs may result in longer waiting times.
Producing the same goods locally may cost more but take less time, and therefore you may need to adjust your
stock levels accordingly.
4. Product Type - Inventory management must take into consideration the
different types of products in stock. For example, some products may be
perishable and therefore have a shorter shelf life than others. In this case
inventory must be managed to ensure that these items are rotated in line with
expiration dates.
5. Management -Ultimately, responsibility for managing your business’
inventory sits with you and any co-owners. While you may have multiple
employees acting as managers to oversee inventory processes, they typically
will not have the same stake in the business as you do.
6. External Factors - There are multiple external factors that may affect
inventory control. For example, economic downturns may occur and this is
something that you will generally have very little control over. Assessing the
economy is a must in order to guard against stock outs or a buildup of excess
inventory. Other factors may include the real estate markets or the extent of
local competition. These factors are also largely out of your control, so it is a
good idea to assess the external climate regularly in order to stay prepared.
METHODS/MODELS OF INVENTORY
CONTROL
1 ABC ANALYSIS
• ABC method of inventory control involves a system that controls inventory
and is used for materials and throughout the distribution management. It is
also known as selective inventory control or SIC.

• ABC analysis is a method in which inventory is divided into three categories,

i.e. A, B, and C in descending value. The items in the A category have the
highest value, B category items are of lower value than A, and C category
items have the lowest value.

• Inventory control and management are critical for a business. They help to
keep their costs under control. The ABC analysis helps the business to control
inventory by letting the management focus on the highest value goods (the
A-items) and not on the many low-value goods (the C-items).
Need for Prioritizing Inventory
• Item A: In the ABC model of inventory control, items categorized under A are
goods that register the highest value in terms of annual consumption. It is
interesting to note that the top 70 to 80 percent of the yearly consumption
value of the company comes from only about 10 to 20 percent of the total
inventory items. Hence, it is crucial to prioritize these items.
• Item B: These are items that have a medium consumption value. These
amount to about 30 percent of the total inventory in a company which
accounts for about 15 to 20 percent of annual consumption value.
• Item C: The items placed in this category have the lowest consumption value
and account for less than 5 percent of the annual consumption value that
comes from about 50 percent of the total inventory items.
Uses of ABC Analysis
• The ABC analysis is widely used in supply chain management and stock checking and inventory system and is implemented as a cycle
counting system. It is most important for companies that seek to bring down their working capital and carrying costs. This done by
analysing the inventory that is in excess stock and those that are obsolete by making way for items that are readily sold. This helps avoid
keeping the working capital available for use rather than keeping it tied up in unhealthy inventory.
• When a company is better able to check its stock and maintain control over the high-value goods it helps them to keep track of the value
of the assets that are being held at a time. It also brings order to the reordering process and ensures that those items are in stock to
meet the demands.
• The items that fall under the C category are those that slow-moving and need not be re-ordered with the same frequency as item A or
item B. When you put the goods into these three categories, it is helpful for both the wholesalers and the distributors to identify the
items that need to be stocked and those that can be replaced.
• For Example- ‘H&M’ manufactures 80% of its retail inventory in advance and introduces the remaining 20% based on the most current
market trends.
• Similarly, ‘Amazon’ does not keep stock of every single item offered on its website. The stocks of only the popular items that are
frequently purchased are maintained. If there is an order for an unpopular item, then Amazon would request it from its distributor, who
would then ships it to the company.
2. EOQ Analysis - ECONOMIC ORDER QUANTITY
• Economic order quantity is a useful metric for businesses that buy and hold inventory for manufacturing, resale, internal use or any other
purpose. Businesses that follow EOQ look at all costs related to purchasing and delivery while also factoring in demand for the product,
purchase discounts and holding costs.
• Experienced business owners and managers understand that purchasing and finding the ideal inventory levels can be complex. When
your vendors offer volume discounts and other incentives to purchase more, EOQ can help you decide on the right place to draw the line.
• EOQ relies on the economic order quantity formula (found below). That gives you a data-driven result to help optimize business
profitability.

• Why Is Economic Order Quantity (EOQ) Important?

• Economic order quantity is a key metric for your organization’s sustainability because ordering too much can lead to high holding costs
and take resources away from other business activities, like marketing or R&D, that could further boost sales or reduce costs.
• Inventory is a type of working capital. Working capital represents business assets needed for regular operations. But too much working
capital can eat into your profits, and it also represents a big opportunity cost.
• EOQ may not be extremely helpful when managing your office supply closet. It's most important when looking at large, high volume or
expensive purchases. As your orders and inventory grow and scale, EOQ has a greater impact on profits.
Benefits of Economic Order Quantity (EOQ)
• ]The main benefit of using EOQ is improved profitability. Here’s a list of benefits that all add up to savings and
improvements for your business:
1. Improved Order Fulfillment: When you need a certain item or something for a customer order, optimal EOQ
ensures the product is on hand, allowing you to get the order out on time and keep the customer happy. This
should improve the customer experience and may lead to increased sales.
2. Less Overordering: An accurate forecast of what you need and when will help you avoid overordering and tying up
too much cash in inventory.
3. Less Waste: More optimized order schedules should cut down on obsolete inventory, particularly for businesses
that hold perishable inventories that can result in dead stock.
4. Lower Storage Costs: When your ordering matches your demand, you should have less products to store. This can
lower real estate, utility, security, insurance and other related costs.
5. Quantity Discounts: Planning and timing your orders well allows you to take advantage of the best bulk order or
quantity discounts offered by your vendors.
Challenges of Economic Order Quantity (EOQ)
• While many businesses want to use EOQ to determine order sizes, it isn’t always easy to achieve. When determining
EOQ, you may run into these challenges:
1. Poor Data: One of the biggest challenges of determining EOQ is access to accurate and reliable data. Manual or
spreadsheet-driven systems may provide low-quality or outdated information, which can lead to inaccurate
calculations.
2. Outdated Systems: Old and outdated systems may have incomplete data and lead to missing out on potential
savings. An inventory management system or cloud-based ERP can solve this problem.
3. Business Growth: The EOQ formula is ideal for businesses with consistent inventory needs. With a fast-growing
business, relying on EOQ can lead to inventory shortages.
4. Inventory Shortages: If you’re just starting to use this method, it often generates smaller orders. If you are too
conservative with your calculations, you could wind up under-ordering.
5. Seasonal Needs: Seasonality can make EOQ more challenging, but not impossible. This is because there could be
major changes in customer demand throughout the year.
EOQ FORMULA
EXAMPLE 1 :

• Compute the economic order quantity from the following

information:
• Annual inventory requirement : 4,00,000 units
• Cost of placing each order : Rs. 20
• Carrying cost of one year : Rs. 4 per unit
• SOLUTION:
• EOQ = √2AO/C
• = √2×400000×20/4
• = 2,000 units
EXAMPLE 2 : Calculate EOQ from the following information. A ltd. Sells 2,25,000 units of a wrist
watch per annum. The unit cost per watch is Rs. 1,000. The cost of placing an order is Rs. 500 and
carrying cost is 10% (assume always % of unit price cost) .also find out the number of orders to be
placed per year.

• SOLUTION: • EOQ = √2AO/C

EOQ = √2AO/C
• = √2×2,25,0000×500/100
Where,
A = annual inventory requirement in units
• = 1,500 units
= 2,25,000 units • Number of orders = A / EOQ
O = Ordering cost per order • = 2,25,0000/500
= Rs 500
• = 150 orders
C = carrying cost per unit
= 10% of Rs 1,000
3. HML Classifications
• The High, Medium and Low (HML) classification follows the same procedure as is adopted in ABC
classification. Only difference is that in HML, the classification unit value is the criterion and not the annual
consumption value. The items of inventory should be listed in the descending order of unit value and it is up
to the management to fix limits for three categories. For example, the management may decide that all units
with unit value of 2000 and above will be H items, 1000 to 2000 M items and less than 1000, L items.
• The HML analysis is useful for keeping control over consumption at departmental levels, for deciding the
frequency of physical verification, and for controlling purchases.
4. VED Classification
While in ABC, classification inventories are classified on the basis of their consumption value and in HML
analysis, the unit value is the basis, critically of inventories is the basis for vital, essential and desirable
categorisation.
The VED analysis is done to determine the critically 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 if it is not so essential, the part is given 'D' classification. For 'V items, a large
stock of inventory is generally maintained, while for 'D' items, minimum stock is enough.
5. SDE Classification
• The SDE analysis is based upon the availability of items and is very useful in the context of scarcity of supply. In this
analysis, 'S' refers to 'scarce' items, generally imported, and those which are in short supply. 'D' refers to difficult
items which are available indigenously but are difficult items to procure. Items which have to come from distant
places or for which reliable suppliers are difficult to come by, fall into 'D' category, 'E' refers to items which are easy
to acquire and which are available in the local markets.
• The SDE classification, based on problems faced in procurement, is vital to the lead time analysis and in deciding on
purchasing strategies.
6. FSN Analysis
• FSN stands for fast moving, slow moving and non-moving. Here, classification is based on the pattern of issues from
stores and is useful in controlling obsolescence. To carry out an FSN analysis, the date of receipt or the last date of
issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction.
The items are usually grouped in periods of 12 months.
• FSN analysis is helpful in identifying active items which need to be reviewed regularly and surplus items which have
to be examined further. Non-moving items may be examined further and their disposal can be considered.
7. REORDER LEVEL
• The reorder level of stock is the fixed stock level that lies between the maximum and minimum stock levels. At the
reorder stock level, an order for the replenishment of stock should be placed.
• In other words, the reorder stock level is the level of inventory at which a new purchase order should be placed.
• The reorder level of stock is generally higher than the minimum level to cover any emergencies that may arise as a
result of abnormal usage of materials or unexpected delay in obtaining fresh supplies.
• reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new
manufacturing run.
• Reorder level depends on a company’s work-order lead time and its demand during that time and whether the
company maintain a safety stock. Work-order lead time is the time the company’s suppliers take in manufacturing
and delivering the ordered units.
• Identifying the correct reorder level is important. If a company places a new order too soon, it may receive the
ordered units earlier than expected and it would have to bear additional carrying costs in the form of warehousing
rent, opportunity cost, etc. However, if the company places an order too late, it would result in stock-out costs, for
example lost sales, etc.
Formula Of Reorder Level

• Reorder level depends on whether a safety stock is maintained.

• If there is no safety stock, reorder level can be worked out using the following formula:

• Reorder Level = Average Demand × Lead Time

• Both demand and lead time must be in the same unit of time i.e. both should in in days or weeks, etc.

• If a company maintains a safety stock, reorder level calculation changes are follows:

• Reorder Level = Average Demand × Lead Time + Safety Stock

8. JIT - Just In Time
• The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from
suppliers directly with production schedules. Companies employ this inventory strategy to increase
efficiency and decrease waste by receiving goods only as they need them for the production process, which
reduces inventory costs. This method requires producers to forecast demand [Link] just-in-time
(JIT) inventory system is a management strategy that minimizes inventory and increases efficiency.
• Just-in-time manufacturing is also known as the Toyota Production System (TPS) because the car
manufacturer Toyota adopted the system in the 1970s.
• Kanban is a scheduling system often used in conjunction with JIT to avoid overcapacity of work in process.
• The success of the JIT production process relies on steady production, high-quality workmanship, no
machine breakdowns, and reliable suppliers.
• The terms short-cycle manufacturing, used by Motorola, and continuous-flow manufacturing, used by IBM,
are synonymous with the JIT system.
Advantages of Just-in-Time Inventory
• The use of just-in-time inventory has the following advantages:
• There should be minimal amounts of inventory obsolescence, since the high rate of inventory turnover keeps any
items from remaining in stock and becoming obsolete.
• Since production runs are very short, it is easier to halt production of one product type and switch to a different
product to meet changes in customer demand.
• The very low inventory levels mean that inventory holding costs (such as warehouse space) are minimized.
• The company is investing far less cash in its inventory, since less inventory is needed.
• Less inventory can be damaged within the company, since it is not held long enough for storage-related accidents to
arise. Also, having less inventory gives materials handlers more room to maneuver, so they are less likely to run into
any stored inventory and cause damage.
• Production mistakes can be spotted more quickly and corrected, which results in fewer products being produced
that contain defects.
Disadvantages of Just-in-Time Inventory

• Despite the magnitude of the preceding advantages, there are also some disadvantages associated
with just-in-time inventory, which are:
• A supplier that does not deliver goods to the company exactly on time and in the correct amounts
could seriously impact the production process.
• A natural disaster could interfere with the flow of goods to the company from suppliers, which
could halt production almost at once.
• An investment should be made in information technology to link the computer systems of the
company and its suppliers, so that they can coordinate the delivery of parts and materials.
• A company may not be able to immediately meet the requirements of a massive and unexpected
order, since it has few or no stocks of finished goods.
Quality Management Systems and TQM:
TQM - TOTAL QUALITY MANAGEMENT
• TQM is a management approach for an organization, depending upon the
participation of all its members (including its employees) and aiming for
long-term success through customer satisfaction. This approach is beneficial
to all members of the organization and to the society as well.
• Total Quality Management is defined as a customer-oriented process and
aims for continuous improvement of business operations. It ensures that all
allied works (particularly work of employees) are toward the common goals
of improving product quality or service quality, as well as enhancing the
production process or process of rendering of services. However, the
emphasis is put on fact-based decision making, with the use of performance
metrics to monitor progress.
Definition of TQM
• TQM stands for total quality management, a management procedure for
determining the best quality standards. The basic rule of total quality
management is determined by analysing the product before or during the
manufacturing periods to eliminate all faults and flaws, instead of checking or
analysing the product after it is manufactured. Total quality management
requires the important role of everyone involved with the company to take
part in the analysis effectively and efficiently. The primary role of the TQM is
to provide high-quality products with continuous analysis and enhance the
quality as per the market requirements. Total quality management depends
upon teamwork and putting effort from every company employee. The
primary roles under total quality management considered important are
handling, directing, controlling, analysing, and managing.
PRINCIPLES OF TQM
• TQM can be summarized as a management system for a customer-focused organization that involves all employees in
continual improvement. It uses strategy, data, and effective communications to integrate the quality discipline into the
culture and activities of the organization. Many of these concepts are present in modern quality management systems,
the successor to TQM. Here are the 8 principles of total quality management:
1. Customer-focused: The customer ultimately determines the level of quality. No matter what an organization does to foster
quality improvement—training employees, integrating quality into the design process, or upgrading computers or
software—the customer determines whether the efforts were worthwhile.
2. Total employee involvement: All employees participate in working toward common goals. Total employee commitment
can only be obtained after fear has been driven from the workplace, when empowerment has occurred, and when
management has provided the proper environment. High-performance work systems integrate continuous improvement
efforts with normal business operations. Self-managed work teams are one form of empowerment.
3. Process-centered: A fundamental part of TQM is a focus on process thinking. A process is a series of steps that take inputs
from suppliers (internal or external) and transforms them into outputs that are delivered to customers (internal or external).
The steps required to carry out the process are defined, and performance measures are continuously monitored in order to
detect unexpected variation.
4. Integrated system: Although an organization may consist of many different functional specialties often organized into
vertically structured departments, it is the horizontal processes interconnecting these functions that are the focus of TQM.
Micro-processes add up to larger processes, and all processes aggregate into the business processes required for defining
and implementing strategy. Everyone must understand the vision, mission, and guiding principles as well as the quality
policies, objectives, and critical processes of the organization. Business performance must be monitored and communicated
continuously.
An integrated business system may be modeled after the Baldrige Award criteria and/or incorporate the ISO 9000 standards.
Every organization has a unique work culture, and it is virtually impossible to achieve excellence in its products and services
unless a good quality culture has been fostered. Thus, an integrated system connects business improvement elements in an
attempt to continually improve and exceed the expectations of customers, employees, and other stakeholders.
5. Strategic and systematic approach: A critical part of the management of quality is the strategic and systematic approach
to achieving an organization’s vision, mission, and goals. This process, called strategic planning or strategic management,
includes the formulation of a strategic plan that integrates quality as a core component.
[Link] improvement: A large aspect of TQM is continual process improvement. Continual improvement drives an
organization to be both analytical and creative in finding ways to become more competitive and more effective at meeting
stakeholder expectations.
[Link]-based decision making: In order to know how well an organization is performing, data on performance measures are
necessary. TQM requires that an organization continually collect and analyze data in order to improve decision making
accuracy, achieve consensus, and allow prediction based on past history.
8. Communications: During times of organizational change, as well as part of day-to-day operation, effective communications
plays a large part in maintaining morale and in motivating employees at all levels. Communications involve strategies,
method, and timeliness.
Importance Of Total Quality Management
1. Cost Reduction & Increased Profitability - TQM helps reduce total quality costs. In other words, it aims to
produce superior quality products and services so that no additional costs are borne later. Many companies
like Motorola implemented TQM techniques to reduce manufacturing costs, saving billions of dollars.
2. Enhanced Productivity - Some organizations offer superior quality resources, high-end infrastructure and
excellent technology—all of which are instrumental in motivating employees. With improved standards of
work and better working conditions, employees are encouraged to maximize their output.
3. Lesser Redundancy - Every organization aims at improving productivity and profitability. TQM uses a
systematic approach to reduce any duplication of tasks, therefore saving time and fully utilizing available
resources.
4. Improved Innovation Process - As we’ve already established, TQM includes a research phase. Organizations
collect data about any current challenges or problems to devise effective solutions. Some organizations rely on
unique strategies to get to the root of a problem. For example, businesses often use the A/B testing method to
compare two versions of the same strategy and implement the one that produces better results.
5. Continual Improvement -.TQM tools like progress-trackers help businesses monitor their employees’ performance at
all times. There are internal as well as external gains from continuous improvement. External gains include better
product quality, increased market share and productivity. Internal gains include effective teamwork, increased job
satisfaction and better workplace culture.
6. Effective Communication - TQM techniques push individuals to collaborate and support each other for the greater
benefit of an organization. Increased teamwork and cross-functional collaboration prompt everyone to strive for
continuous improvement. For example, clear commAZunication enables a production chain that functions seamlessly
because everyone is on the same page.
7. Holistic Approach To Management - Many organizations struggle with low employee engagement. TQM helps
workplaces bring behavioral changes by facilitating self-development, teamwork and improved employee engagement.
Individuals show more interest in their roles because the organization prioritizes their well-being and job satisfaction.
8. Increased Goodwill - Organizations can establish quality standards for goods/services using TQM. Internal
stakeholders (employees and investors) get lucrative incentives and profitable return on investment. External
stakeholders (customers and clients) get superior quality products and services. The result: positive brand image and
goodwill in the long-run.
 Philosophy of TQM
1. Policing or inspection is never the right answer to quality improvement.
2. Quality always comes before the schedules.
3. For the commitment of quality, it is essential to involve the top management team and quality leaders.
4. A quality program requires organization-wide efforts and long-term commitment along with proper
investment.
5. Quality management is always a cheaper thing to implement on the very first instance.
6. Performance measurement is measured in the cost of quality.
7. Quality is considered as an inherent characteristic of a product and not an added extra.
8. The performance standard while implementing quality management should be zero defects.
9. Prevention is always better than cure.
10. A good leader will always implement better quality standards.
QUALITY CONTROL
• In the words of Alford and Beatly quality control may be defined as "Industrial management
technique by means of which products of uniform acceptable quality are manufactured". It is
concerned with making things right rather than discovering and rejecting those made wrong.
• It may also be defined as "Quality Control is an effective system for integrating the quality
development, quality maintenance and quality improvement efforts of various groups in an
organisation so as to enable production and service, at the most economic levels which allow for
full customer satisfaction". In other words, quality is everybody's business and not only the duty of
the persons in the Inspection Department.
• In short, we can say that quality control is a technique of management for achieving required
standard of products.
• In a more limited sense, quality control is frequently used to refer to a specific organisation within
the industrial enterprise which is assigned responsibility for many of the activities necessary to
achieve quality objectives.
Need and Importance of Quality Control The quality
control is needed due to the following reasons:
1. Customer's satisfaction-While purchasing a product, the customer expects that the quality of the product should be in
accordance with the declared standards. If the manufacturer fails to achieve quality control, the customer will be dissatisfied
and the firm will lose its reputation in the market. This may adversely affect the sale of the products manufactured by the
firm.
2. Economy. One of the major aims of manufacturer is to make a product as cheapnas possible. The quality control activities
can achieve settings and adjustment of machinery in an economical way. This reduces the cost of production while retaining
the desiredquality.
3. Reduction in Scrap. Quality control ensures the best utilization of material by locating and rectifying process faults and
product defects. Hence the amount of scrap is reduced to a considerable extent.
4. Feasibility of Using Spare Parts. It is often desired to replace certain component parts in a machine. The manufacturers
produce spare parts to supply customers as and when needed. The quality control of products ensures the interchangeability
of spare parts.
5. Goodwill Creation-In the age of throat cut competition, product can only survive on account of its quality. Quality control
ensures the availability of quality products. Hence, the programme of quality control creates and enhances the goodwill of
the firm. The position of a unit (firm) in the industrial world depends on the quality of its productsor services.
6. Increase in Status of Employees-The status of the employees, of a particular
manufacturing unit, in society, is affected by the performance and appearance
of the products manufactured by the particular unit. Employees of certain units
get high respect in the society to which they belong. The employees
themselves are also proud of their connections with certain units, e.g. Tata
concerns, Birla concerns etc.
7. Increase in Profit-A manufacturer of a quality products can certainly earn the
expected profit and can hold a big share of the market. This depends on the
quality standards of the products manufactured by the firm.
8. A Mirror for a Manufacturer-The level of quality is the mirror for a firm,
which reflects the design of the product, skill of the manpower employed,
types of equipment, tools and machinery in use, amount of testing and
inspection done etc. High level of quality reflects small number of defective
products, high skill level of manpower, effective testing and inspection method
etc.
PHASES OF QUALITY CONTROL
PHASES OF QUALITY CONTROL
1. Establish controls
• Establishment of specific set of controls to which product and service quality are to conform. These
should be properly defined and documented so that there is no issue in understanding and
implementing them. The development and the quality department should both be aligned with the
controls before the production or development begins.
2. Test and check the Product/service
• Checking product or service quality is very important even if the manufacturing was done as per
defined controls. The testing includes testing the product or service as a whole and as modules to
make sure to cover as many scenarios as possible.
3. Analyze Variance
• Analyzing variances between set controls and actual quality. Ideally there should not be any
variances but if there are then they should be well analyzed and documented to make sure that
right numbers are there and the extent of quality issues can be assessed.
4. Check and Define Limits
• There should be proper checking as to whether the variances are within statistical limits. These are defined as
tolerance levels.
• The tolerance can be defined at e.g. 5% or 10%. If the quality variances are within these limits then the variances are
documented but no action is taken.
5. Corrective Decisioning
• If the variances are way over the tolerance limits then a corrective action and decision has to be taken for sure.
Either it can be rejecting a batch or sending them back for rework to improve the overall quality.
• The entire process would be repeated to make sure that no product of inferior quality reaches the customers.
6. Benchmark and Feedback
• This includes establishing procedures so that the variances do not arise again. Quality control is an ongoing process
which keeps improving in every development cycle. These quality data and feedback should all be properly analyzed
and looped back in quality control definition step to ensure that the next time, the quality is even higher within the
budgetary limits though.
• Quality control attaches immense importance to statistical procedures as it these procedures that lend quantitative
authenticity to statistical controls.
QUALITY SPECIFICATION
• Quality specifications are detailed requirements that define the quality of a product,
service or process. Quality includes tangible elements such as measurements and
intangible elements such as smell and taste. The following are illustrative examples of
quality specifications.
1. Food
• Precise definitions that are used to sort food into quality grades. For example, apples
might be sorted according to size, ripeness, color, symmetry and condition to offer a
premium and non-premium grade.
2. Manufacturing
• Abicycle manufacturer performs automated quality control testing on all units before
shipping based on specifications such as detailed measurements designed to ensure
that a bicycle's tire is properly aligned to its assembly.
3. IInfrastructure
• A solar panel manufacturer guarantees the conversion efficiency of its modules over time. This is based on a specification
of rated power output and percentage of that output that can be expected as the panels approach end-of-life, often 25
years.
4. Formulations
• The amount of a high quality ingredient in a product. For example, a beverage that is 30% organic pineapple juice.
5. Materials
• Material quality such as the thread count of a fabric.
6. Software
• Specifications for the performance of a software service such as a 99.99% availability rate.
7. Services
• A hotel chain defines detailed specifications of what it means for a room to be clean. This is used to define processes for
cleaning services and quality control checks.
Quality at Source

• Quality at the source is a lean manufacturing principle which defines that

quality output is not only measured at the end of the production line but at
every step of the productive process and being the responsibility of each
individual who contributes to the production or on time delivery of a product
or service. In a practical sense it would involve each operator checking his or
her own work before the part/component or product is sent to the next step
in the process. This practice when first implemented within the workforce
will be a challenging change to company culture but will highlight the
relevance of the product's or service's conformance to customer
requirements and standards, thus also imparting the importance of quality
standards and customer satisfaction within the workforce.
Implementing Quality at the source
In order to make the cultural shift within an operation's workforce to embrace quality at the source the following items should be
considered:
• Employee understanding of who the customer is and their requirements.
• Internal quality audits -Employee and team awareness of quality standards and benchmarks.
• Employee understanding of the customer's intended use of the product or service.
• Multi-skilled workforce which can provide support and help in different process steps.
• Required tools and technology to identify quality flaws and rectify them in an efficient manner.
• Proper data collection and tracking of quality faults
• Open communication of standards, performance and processes.

The advantages of quality at the source are many, including: better informed employees, cultural awareness of the importance of
quality to the customer, reduction in rework expenses, reduction in production waste, improvement in plant and process OEE,
and most importantly he empowerment of employees in achieving the desired quality standard required by customers.
COST OF QUALITY
• Cost of quality (COQ) is defined as a methodology that allows an
organization to determine the extent to which its resources are used
for activities that prevent poor quality, that appraise the quality of
the organization’s products or services, and that result from internal
and external failures. Having such information allows an organization
to determine the potential savings to be gained by implementing
process improvements.
• Cost of quality refers to costs incurred while ensuring that you get
high-quality deliverables. It also includes the cost of dealing with any
defects in your work. This is different from the cost of production,
which refers to the total amount spent on labour and materials.
CLASSIFICATION:
• The cost of quality can be categorized into four categories:

• Prevention Cost
• Appraisal Cost
• Internal Failure Cost and
• External Failure Cost
1. Prevention Costs:
• Prevention costs are the costs of all activities that are designed to prevent poor quality from arising in
products or services. The examples of the prevention costs include:

• Quality planning
• Education and training
• Conducting design reviews
• Supplier reviews and selection
• Quality system audits
• Process planning and control
• Product modifications
• Equipment upgrades
2. Appraisal Costs:
• Appraisal costs are costs that are incurred to ensure the conformance
to quality standards and performance requirements. The examples of
the appraisal costs include:

• Test and inspection (receiving, in-process and final)

• Supplier acceptance sampling
• Product Audits
• Calibration
3. Internal Failure Costs:
• Internal Failure Costs are the costs that are associated with defects
found within the organization before after the customer receives the
product or service. The examples of the internal failure costs include:

• In-process scrap and rework

• Troubleshooting and repairing
• Design changes
• Inventory required to support poor process yields and rejected lots
• Re-inspection / retest of reworked items
4. External Failure Costs:
• External Failure Costs are the costs that are associated with defects found after the customer receives the product
or service. The examples of the external failure costs include:

• Sales returns and allowances

• Replacing defective products
• Service level agreement penalties
• Complaint handling
• Field service labor and parts costs incurred due to warranty obligations
• Product recalls / Legal claims
• Lost customers and opportunities
• Downgrading
• Processing of customer complaints
ZERO DEFECT
• Philip B. Crosby was an eminent Quality Guru , born in 1926, began his quality career as a reliability engineer. He
later participated in the Martin missile experience that spawned the genesis of the Zero Defect movement. He
worked in Quality Management for 14 years in ITT as a Corporate Vice President and Director Quality. In 1979 he
published Quality is Free , which became a bestseller. In response to the interest shown in the book, he left his
organization that year to set up Philip Crosby Associates Incorporated.
• Corsby published his second bestselller , Quality Without Tears, in 1974. Other books associated with his name are
• Corsby is very much popular for these two concepts named as Do It Right First Time and Zero Defects. Corsby
defined the quality as the conformance to the requirements which the company itself has established for its
products based upon the customers needs. He believes that most companies have systems that allow deviation
from actual requirement. The cost that they spend on doing the wrong things right in subsequent chances is 20% of
their revenue in manufacturing companies and 35% of operating expenses for service companies. He believed that
workers should not be the prime responsible for the poor quality, In fact Management set the standard of quality
and workers follow them therefore the initiative comes from the top. Doing things right first time will not prevent
people from making mistakes, but will encourage everyone to improve continuously. He strongly emphasized on the
top- down approach, since he believes that senior management is entirely responsible for quality. The ultimate goal
is to train all the staff and give them the tools for quality improvement , to apply the basic precept of Prevention
Management in every area.
Principles of ZERO DEFECTS
• Quality is conformance to requirements : Every product or service has a requirement according to the customer needs. If these
requirement are achieved by the product when comes to use of the customer then this product categorize as the quality product. for
example if low cost Ink pen full fill the requirement of writing without any blot and skip on the paper then it is called the quality product
in comparison of the a precious gold plated pen if it will not write good and neat on the paper. Hence if a product meets the requirement
of the customer then it conforms the quality of the product , no matter how costly it is.
• Defect prevention is preferable to quality inspection and correction : It is better to prevent the defect at its origin rather to inspect it in
the process and then correct it. It saves lot of human power and cost of inspection and correction. For example If a person changes the
poor condition brake shoes of his bike before next riding then it will prevent lot of energy of the rider and reduce the risk of accident on
the road and generation of new defect in the bike due to poor condition brake shoes which observed later and needs the correction and
in turn of high cost of repair.
• Standard of Quality is always be ZERO DEFECT , not close enough. : If any product does not meet the requirements then the product is
not the quality product even if it close to meet the requirement, because on the basis of Zero Defect any non conformance is not, fore
granted. The product is not acceptable and categorize as under quality product.
• Quality is measure on the basis of Price - Price of Non Conformance ( PONC): This is the key principle, Crosby's believed that every defect
incur a cost. To find and correct and prevent this defect organization introduces many steps like Inspection , Time , Rework, Scrape ,
Collection of data of customer satisfaction etc. All these steps required a huge amount of money and so lot of revenue has lost to
maintain all steps to prevent the defects and therefore to maintain the Quality, cost must considered. Every non-conformance
contributes a cost in terms of loss of revenue due to it.
CONTINUOUS IMPROVEMENT
• Continuous improvement, sometimes called continual improvement, is the ongoing improvement of products,
services or processes through incremental and breakthrough improvements. These efforts can seek "incremental"
improvement over time or "breakthrough" improvement all at once.
• THE CONTINUOUS PROCESS IMPROVEMENT MODEL
• Among the most widely used tools for the continuous improvement model is a four-step quality assurance
method—the plan-do-check-act (PDCA) cycle:
1. Plan: Identify an opportunity and plan for change.
2. Do: Implement the change on a small scale.
3. Check: Use data to analyze the results of the change and determine whether it made a difference.
4. Act: If the change was successful, implement it on a wider scale and continuously assess your results. If the change
did not work, begin the cycle again.
• Other widely used methods of continuous improvement, such as Six Sigma, lean, and total quality management,
emphasize employee involvement and teamwork, work to measure and systematize processes, and reduce
variation, defects, and cycle times.
PRINCIPLES OF CONTINUOUS IMPROVEMENT
1. Focusing on the customers
• Focusing on your customers is perhaps the most important of all the continuous improvement processes. No business can exist in a vacuum. The
customers are the reason behind the success of any business. So, all your business products or processes should focus on the customers’ needs.
2. Incorporating employees’ ideas
• Continuous improvement isn’t just about the top management, outside consultants, or leadership teams. The workers’ ideas on the ground, those who
handle the process must be taken into consideration.
• When you talk to your workers, you get great ideas that can help improve the processes. They are the people who know the challenges in the process
and the best ways to sort them out.
3. Leadership support
• While employee ideas are the key content for continuous improvement, the top management must be willing to support these ideas. It’s not a must for
team leaders to generate ideas, but they are responsible for continuous improvement practice.
• For example, they must be involved in delivering reinforcement, bursting barriers, providing resources, sharing customer needs, aligning goals, and
communicating strategy.
4. Driving step by step changes
• In a continuous improvement process, changes need not be abrupt. Incremental changes allow top management and employees to adapt to the changes
gradually. Incremental changes have several benefits. They can result in a bigger impact when managed well. Taking changes in steps is also less
expensive compared to making big abrupt changes.
5. Using measurable, fact-based methods
• To determine the success of a continuous implementation process, you must use methods with measurable parameters. Continuous
improvement isn’t just about giving 110% or working hard.
• When making changes, you must know and measure the starting point, monitor your progress, and measure where you are at the
moment. Without such measurements, you’ll never know whether you’ve made any progress.
6. Set goals
• Setting goals go hand-in-hand with using measurable methods. Setting goals will give your business some sense of direction. You can set
both short-term and long-term goals then come up with measurable parameters to know where you are achieving or falling short of your
goals.
• With these goals, your workers will be motivated to put more effort. When setting goals, you must ensure they are realistic and
achievable; otherwise, your employees will get discouraged.
7. Incorporate teamwork
• Although some individuals can succeed in continuous improvement processes, a teamwork environment is better for optimal continuous
improvement achievements. When people work in a team, they'll be healthy competition, social reinforcement, shared accountability,
and synergy of ideas, which will improve productivity.
BENCHMARKING
• Benchmarking is the process of comparing the cost, cycle time, productivity, or quality of a specific process or
method to another that is widely considered to be an industry standard or best practice. Essentially, benchmarking
provides a snapshot of the performance of your business and helps you understand where you are in relation to a
particular standard. The result is often a business case for making changes in order to make improvements. The
term benchmarking was first used by cobblers to measure ones feet for shoes. They would place the foot on a
"bench" and mark to make the pattern for the shoes. Benchmarking is most used to measure performance using a
specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or
defects per unit of measure) resulting in a metric of performance that is then compared to others.

• Also referred to as "best practice benchmarking" or "process benchmarking", it is a process used in management
and particularly strategic management, in which organizations evaluate various aspects of their processes in relation
to best practice, usually within a peer group defined for the purposes of comparison. This then allows organizations
to develop plans on how to make improvements or adopt best practice, usually with the aim of increasing some
aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which
organizations continually seek to challenge their practices.
Types of benchmarking
1) Process benchmarking - The initiating firm focuses its observation and investigation of business processes with a goal of
identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the
objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a
consideration.
2) Financial benchmarking - Performing a financial analysis and comparing the results in an effort to assess your overall
competitiveness.
3)Performance benchmarking - Allows the initiator firm to assess their competitive position by comparing products and
services with those of target firms.
4) Product benchmarking - The process of designing new products or upgrades to current ones. This process can sometimes
involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
5)Strategic benchmarking - Involves observing how others compete. This type is usually not industry specific meaning it is
best to look at other industries.
6)Functional benchmarking - A company will focus its benchmarking on a single function in order to improve the operation
of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and
Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be
disaggregated into processes to make valid comparison.
Procedure
The following is an example of a typical shorter version of the
methodology:
1. Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of
research techniques may be required. They include: informal conversations with customers, employees, or suppliers;
exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys,
questionnaires, re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before
embarking on comparison with other organizations it is essential that you know your own organization's function, processes;
base lining performance provides a point against which improvement effort can be measured.
2. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in
addiction treatment he/she would try to identify other fields that also have hand off challenges. These could include air
traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult
customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of
study.
4. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of
measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked
to protect confidential data by neutral associations and consultants.
5. Visit the "best practice" companies to identify leading edge practices
- Companies typically agree to mutually exchange information
beneficial to all parties in a benchmarking group and share the results
within the group.
6. Implement new and improved business practices - Take the leading
edge practices and develop implementation plans which include
identification of specific opportunities, funding the project and selling
the ideas to the organization for the purpose of gaining demonstrated
value from the process.
What is Poka Yoke?
• Poka Yoke is a Japanese phrase that means error prevention. It was developed in the sixties of the previous century by Shigeo Shingo from Japan. He was
an engineer at the Toyota car factory. The Toyota production system is still the most effective manufacturer using Poka Yoke today and comes close to
error proof manufacturing.
• The method is used to prevent defects and resolve them during the production process in industrial engineering, eliminating human quality control after
the process. Poka Yoke is a frequently used method in Lean Manufacturing and Six Sigma to ensure as little errors in a production process as possible. A
‘poka’ is an ‘inadvertent error’ and ‘yokeru’ is Japanese for ‘preventing’.
• Poka Yoke makes it practically impossible to have processing errors. It forces actions to be carried out correctly, leaving no room for misunderstandings
and/or human error. It’s about measures that prevent further errors from being made.
• Many solutions based on this concept tend to be simple, cheap, and effective. They can be integrated into the product design or in one of the process
steps.
• A good example is smartphone SIM cards. After all, there’s only one way to place the SIM card in the phone. It’s impossible to do it wrong. It therefore is
a mistake proofing device.
• Another example of a solution based on this concept is digital spell checks. The Poka Yoka process helps manufacturers with eliminating defects that have
occured, but in the first place to prevent defects from occuring.
• Many technological inventions have been based on this concept. Examples are control systems, contact methods, fixed-value methods, motion-steps
methods and sensing devices. Some of these solutions are used very often, like limit switches, touch switches and proximity switches.
• Orgininally, Poka Yoke was named Baka Yoke. This literally means idiot proofing, and was replaced with the milder mistake proofing Poka Yoke.
Implementing Poka Yoke Stages for Process
Improvement
1. Define

• During this phase, the problem causing the defect is described and defined. It needs to be an objective description that doesn’t draw conclusions right away. It’s possible to monitor the shop floor
during the production process.

• This is also indicated with the word ‘Gemba’, which is Japanese for shop floor. The shop floor is where the process happens, and that’s where the causes of problems may also be hiding. If the problem
occurs at the end user, it’s a good idea to define the problem objectively from this perspective.

2. Measure

• Usually, the measuring stage is applied in case of complex problems in the production process. A test is used to discover how often the problem occurs. A percentage is then calculated based on the
results.

• The higher the percentage, the more important it is to solve the problem at its source. Apart from a production error, it may also be a case of user error. In such a case, a so-called test group would be
used that tests the product over a certain period. The outcome of this determines how the problem will be dealt with and solved.

3. Analyse

• During this stage, it becomes clear whether a Poka Yoke measure can be applied. The process is analysed thoroughly, and the cause of the defect is tracked down. Only when the source of the issue is
clear, can the search for a solution begin.

4. Improve

• During this phase, analysis is used to deal with the cause of the problem. A solution is developed and implemented. In many cases, Poka Yoke solutions seem obvious, but have a significant positive
impact. They prevent the same mistake from being made in the future.

5. Control

• During this stage, the effect of the changes is measured. If the measure in question works well, and the chance of further potential error is negligible, it concludes with the ‘Zero Quality Control’ and
Zero Defects.
A Poka Yoke example
• The Netherlands (Europe) has a lot of commuters on bicycles. They also go out on their bikes in the rain.
Comfortable waterproof clothing offers a solution. In this example, we assume that waterproof clothing are
decent-quality overalls.

• The overalls are easy to put on and have a soft fleece lining. They are also durable and strong for long bike trips and
everyday use, and are made of light polyamide material with reflective stripes.

• The overalls have a zip closure on the front that goes down. The zip is a precarious part of the rain overalls, since it
lets through water and wind. In order to limit this, there is a cover along the length of the zip that can be closed
using velcro.

• Getting in and out of the rain overalls still presents difficulties, and tears and holes form at the base of the zip. In
order to solve this problem, we will consider it step by step.
ISO 9000
• SO 9000 is defined as a set of international standards on quality
management and quality assurance developed to help companies
effectively document the quality system elements needed to
maintain an efficient quality system. They are not specific to any one
industry and can be applied to organizations of any size.

• ISO 9000 can help a company satisfy its customers, meet regulatory
requirements, and achieve continual improvement. It should be
considered to be a first step or the base level of a quality system.
 ISO 9000 history and revisions: ISO 9000:2000,
2008, and 2015
• ISO 9000 was first published in 1987 by the International Organization for Standardization (ISO), a specialized international agency for
standardization composed of the national standards bodies of more than 160 countries. The standards underwent revisions in 2000 and
2008. The most recent versions of the standard, ISO 9000:2015 and ISO 9001:2015, were published in September 2015.
• ASQ administers the U.S. Technical Advisory Groups and subcommittees that are responsible for developing the ISO 9000 family of
standards. In its standards development work, ASQ is accredited by ANSI.
• ISO 9000:2000
• ISO 9000:2000 refers to the ISO 9000 update released in the year 2000.
• The ISO 9000:2000 revision had five goals:
i. Meet stakeholder needs
ii. Be usable by all sizes of organizations
iii. Be usable by all sectors
iv. Be simple and clearly understood
v. Connect quality management system to business processes
vi. ISO 9000:2000 was again updated in 2008 and 2015. ISO 9000:2015 is the most current version.
The seven quality management principles include
the following as described by the ISO:
• Customer focus – Quality management primarily focuses on meeting customer requirements and striving to exceed
customer expectations.
• Leadership – Helping leaders to establish unity of purpose and direction at all levels and to create conditions to
engage members of the organization in achieving the organization’s quality objectives.
• Engagement of people – Obtaining and maintaining (at all levels throughout the organization) competent,
empowered, and engaged people to enhance the organization’s capability to create and deliver value.
• Process approach – Delivering consistent and predictable results through the use of effective and efficient activities
that are understood and managed as interrelated processes that function as a coherent system.
• Improvement – Maintaining an ongoing, organization-wide focus on improvement.
• Evidence-based decision making – Using the analysis and evaluation of data and information in the decision making
process to produce desired results.
• Relationship management – Managing the organization’s relationships with related parties, such as partners or
vendors, for sustained success.
What is the ISO 9000 series of quality
management system standards?
• The phrase “ISO 9000 family” or “ISO 9000 series” refers to a group of quality management standards which
are process standards (not product standards).
• ISO 9000 Quality management systems – Fundamentals and Vocabulary, referenced in all ISO 9000
Standards.
• ISO 9001 Quality management systems – Requirements, contains the requirements an organization must
comply with to become ISO 9001 certified.
• ISO 9002 – Guidelines for the application of ISO 9001:2015
• ISO 9004 – Managing for the sustained success of an organization, provides guidelines for sustaining QMS
success through evaluation and performance improvement.
• ISO 9001:2015 is the current version of the ISO 9001 standard. ISO 9001 lists requirements, while the other
standards in the 9000 family provide guidelines and information. People often say “ISO 9000 certified“, but
what they mean is they have met the requirements of the ISO 9001 standard. Read more about ISO 9001
Certification.
• The ISO 9000 Series of Quality Standards is not industry specific and is applicable to any manufacturing,
distribution or service organization. It is managed by Technical Committee (TC) 176, comprised of
international members from many industries and backgrounds.
ISO 14000
• What Is ISO 14000?
• ISO 14000 is a set of standards created to help companies around the world reduce their adverse
impact on the environment. It’s a framework for improved and more environmentally-conscious
quality management systems by organizations large and small.

• The ISO 14000 series of standards was introduced in 1996 by the International Organization for
Standardization (ISO) and most recently revised in 2015. (ISO is not an acronym. The short form of
the organization's name is derived from the ancient Greek word ísos, meaning equal or equivalent.)

• Adopting the standards is strictly optional. Companies can get ISO 14000 certified. More than
400,000 organizations around the world have obtained certification, according to the latest ISO
survey.
• ISO 14000 is a set of standards created to help organizations
minimize the environmental impact of their operations.
• The standards were developed by a non-governmental organization
and are intended for use worldwide.
• The U.S. Environmental Protection Agency is among the many
agencies that had input into the standards.
• Adoption of ISO 14000 practices is voluntary.
• Organizations that adopt ISO 14000 may obtain certification that
proves their compliance with environmentally friendly practices.
Understanding ISO 14000
• ISO 14000 is meant to be a step-by-step guide for establishing and then achieving
environmentally-friendly objectives for business practices and products. The purpose is
to help companies manage processes efficiently while minimizing environmental
effects.

• A separate set of standards, called ISO 9000 and introduced in 1987, focuses on the
best management practices for quality assurance. The two systems can be
implemented concurrently.

• ISO 14000 includes standards that cover aspects of management practices inside
facilities, in the immediate environment around the facilities, and during the life cycle
of the actual product. This includes understanding the impact of the raw materials used
to create the product as well as the impact of its eventual disposal.
ISO 14000 Standards
• The core of the ISO 14000 standards is contained in ISO 14001, which lays out the guidelines for
putting an environmental management system (EMS) in place. Then there’s ISO 14004, which offers
additional insight and specialized standards for implementing an EMS.
• Here are the key standards included in ISO 14000:
• ISO 14001: Specification of Environmental Management Systems
• ISO 14004: Guideline Standard
• ISO 14010 – ISO 14015: Environmental Auditing and Related Activities
• ISO 14020 – ISO 14024: Environmental Labeling
• ISO 14031 and ISO 14032: Environmental Performance Evaluation
• ISO 14040 – ISO 14043: Life Cycle Assessment
• ISO 14050: Terms and Definitions
Benefits of ISO 14000
• Obtaining ISO 14000 certification can be considered a sign of a commitment to the environment, which can be used
as a marketing tool for companies. It may also help companies meet environmental regulations that are imposed by
governments in which they do business.
• ISO 14000 certification can open the doors to new business. Some companies prefer to use suppliers that are ISO
14000–certified suppliers.
• Their customers may also pay more for products that are environmentally friendly.
• On the cost side, meeting the ISO 14000 standards can help reduce costs, as it stresses the efficient use of resources,
limiting waste, recycling, and even finding new uses for previously disposed of byproducts.
• Following the guidelines in ISO 14000 does not guarantee that an organization is meeting all of the regulations that
may be imposed by the government under whose jurisdiction it operates.
• In the U.S., the Environmental Protect Agency and some state agencies participated in the creation of ISO 14001, the
core piece of ISO 14000. It includes information about environmental management systems in general, and ISO
14000 in particular, on its website.
DIFFERENCE BETWEEN ISO 9000 & ISO 14000
• The difference between ISO 9000 and ISO 14000 is that ISO 9000 helps in the production of
quality products and is a Quality Management system. On the other hand, ISO 14000 is an
Environmental management system. They help to work within a healthy environment.
• ISO 9000 was established by International Organization for Standardization that formed an
effective quality assurance system. They keep the system of production, manufacturing, and
customer needs in proper health.
• They maintain quality and services in proper rules and regulations.
• ISO 14000 was established to keep the environment of work safe and hygienic, published by the
International Organization for Standardization.
• ISO 14000 series of international standards accepted and maintained for environmental
purposes. It was the first standard accepted worldwide. They guide the System, techniques, and
principles to keep environmental surroundings healthy.
Parameters of Comparison ISP 9000 ISO 14000
First Published In 1987, ISO 9000 was published by In 1992, it was published by BSI (British
International Organization for Standards Institution), and later in 1996, it was
Standardization. published by ISO.

Focus ISO 9000 focuses on Quality management ISO 14000 focuses on healthy Environmental and
and service provided. environmental health management.

Implication The implication of ISO 900 is done by The implication of ISO 14000 is done by
Commitment, the establishment of an improving compliance with laws (environmental),
implementation team, Management Sustainable development, credibility, protests
Representative (MR), observe. and works of environmentalists, worldwide.
awareness, etc.

Series Some standards of the ISO 9000 series are Some standards of ISO 14000 are ISO 1400, ISO
ISO 9004, ISO 9003, ISO 9001, etc. 14004, etc.

Advantages Improve quality and maintain it. Market Environmental healthy surroundings, Saving
credibility, etc. resources, sustainable development, etc.
SIX SIGMA
• What Is the Six Sigma Concept in Quality Management?
• Six Sigma is an approach to quality management that focuses on minimising the defects in a product or
service by measuring the number of defects in a process and systematically resolving them. The Six Sigma
management tool can be widely applied to manufacturers, supply chains, engineering firms, finance,
healthcare, and many more.

• When it comes to quality management, applying the Six Sigma approach does not only mean solving quality
issues. Instead, its emphasis lies on prevention, continuous monitoring, and data collection.

• The main value of the approach is that it focuses on evidence-based decision-making processes, which are
backed up by data and information. So, instead of haphazardly fixing issues that may not cause any real
problems, companies that apply Six Sigma to their quality control processes target very specific problems
and resolve them in a timely manner.
What Are the Key Principles of Six Sigma?
• There are two methodologies that the Six Sigma approach utilizes. These provide a set of steps a
company must follow to optimize processes and ensure quality management.
• The DMAIC Method in Six Sigma - The DMAIC process consists of five steps:
1) Define – The first step of the process is to define what you want to achieve with your project.
2) Measure – Then you need to decide how you will measure your goals and which statistical analysis
and data collection method you will use.
3) Analyze – The third step is to analyze the process and discover potential influencing variables.
4) Improve – You then need to make improvements based on the results of your analysis.
5) Control – Finally, you will need to control the outcome by evaluating whether your changes have
been successful or not.
The DMADV Method in Six Sigma
• The DMADV method, on the other hand, focuses on the development of a new product. This
method also has 5 steps:
1) Define – Start by defining the purpose of the projects and set measurable goals.
2) Measure – The second step is to determine the customer requirements and define what
characteristics should be measurable, so that data can be collected and compared with the specified
requirements.
3) Analyze – The third step involves developing design alternatives, and identifying requirements and
these determine the optimum combination of requirements. As well as determining the life cycle cost
of the design and identifying the best available design option to meet the goals.
4) Design – The design phase involves developing a high-level design, and then a more detailed model
prototype to identify potential flaws before production.
5) Verify – The final phase is for the validation of the design. All relevant stakeholders should be
satisfied with the design, and it should be effective in the real world.
What Are the Benefits of Using Six Sigma in
Quality Control?
• Different types of businesses can implement Six Sigma. The main benefits of using Six Sigma in Quality
Control processes include:
• Cost-savings: Six Sigma helps to identify problems early on, and therefore reduces the cost of recalls or poor
reputation.
• Increased efficiency: By removing mistakes and variability, Six Sigma implementation reduces the time spent
on projects.
• Better management: The approach requires intensive training and strong leadership from top management.
• Quantifiable decision-making: Six Sigma promotes using data to support all decisions, making change
management and quality control more accessible.
• Higher customer satisfaction: More efficiency and improved quality management ensure customer
satisfaction.
• Increased profit: Ultimately, fewer inputs and faster processes lead to higher profits.
THANK YOU