UNIT 2

PRODUCTION
MANAGEMENT
 INVENTORY
• Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.
• An inventory system is the set of policies and
controls that monitor levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
 PURPOSE OF INVENTORY
• Improve customer service
• Economies of purchasing
• Economies of production
• Transportation savings
• Hedge against future
• Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
• To maintain independence of supply chain
 TYPES OF INVENTORY
• Inventory comes in many shapes and sizes such as
– Raw materials – purchased items or extracted materials
transformed into components or products
– Components – parts or subassemblies used in final
product
– Work-in-process – items in process throughout the plant
– Finished goods – products sold to customers
– Distribution inventory – finished goods in the distribution
system
 USES OF INVENTORY
• Anticipation or seasonal inventory-to meet seasonal
demands-crackers for diwali, coolers for summer etc;
• Fluctuation Inventory or Safety stock: buffer demand
fluctuations
• Lot-size or cycle stock: take advantage of quantity discounts
or purchasing efficiencies
• Transportation or Pipeline inventory: which are in transit or
movement
• Speculative or hedge inventory protects against some future
event, e.g. labor strike
• Maintenance, repair, and operating (MRO) inventories
 MATERIALS MANAGEMENT
• Materials Management is one of the areas covered by the
whole process of management.
• For a balanced growth and effective running of enterprise, it is
necessary that the material cost, material supply and material
utilization are so controlled that they lead to:
– Maximization of production
– Reduction in the cost of production and distribution
– Maximization of profit
• Materials management helps in reducing material cost,
preventing huge amount of capital locked up for a longer
period, improving the capital turnover ratio and achieving
higher profitability.
 DEFINITION OF MATERIALS
MANAGEMENT
• Bailey and Farmer define Materials
Management as the management of flow of
materials into an organization to the point
where these materials are converted into the
firm’s end product.
 OBJECTIVES OF MATERIALS
MANAGEMENT:
• Continuity in supply
• Purchasing
• Stores Management
• Inventory control
• Quality of materials
• Competitiveness
• Proper coordination
 MATERIAL HANDLING
Raymond [Link] defines “material handling is a system or
combination of methods, facilities, labour and equipment for moving,
packaging and storing the materials to meet the specific objectives.
In a manufacturing organization, handling activities include-
• Transportation and handling at the suppliers end
• Material handling at manufacturing plant
• Transportation and handling from warehouse to customer
OBJECTIVES OF MATERIAL HANDLING:
• Selection of machines, plant layout to minimize material handling
requirements
• Selection of appropriate and safe material handling equipments
• Prevention of damage to materials
• Increase in productive capacity of the production facilities
• Minimizing the cost of material handling
 ROBOTS
• The word “Robot” is also used in a a general sense to mean any machine
that mimics the actions of human, in a physical sense or in the mental
sense.
• A robot is an electro-mechanical or bio mechanical device or group of
devices that can perform autonomous or pre programmed tasks.
• It can act under the direct control of human as well as autonomously
under a programmed computer.
• It is used to perform tasks that are too dangerous or difficult for humans
to implement directly, such as radio- active waste cleanup or to automate
mindless repetitive tasks that should have performed with more precision
such as automobile production.
• They take many forms, ranging from humanoid, which mimic human form
and the way of moving, to industrial, whose appearance is dictated by the
function they are to perform.
 ADVANTAGES OF ROBOTS
• Technical factors
• Economic factors
• Social factors
Technical Factors:
• It is considered that the humans cannot match
the speed, quality, reliability and predictability
of the robotic systems.
• Higher flexibility of product type
• Better product quality
• Fewer rejects and less wastage
Economic factors:
• Providing maximum utilization of capital intensive production
facilities up to 24x7
• Reducing production losses due to absenteeism and skilled
labour shortage, reducing amount of inventory
• Reducing the manufacturing lead time of the product
• Increasing product quality
Social Factors:
• Many low level tasks can be carried out by robots
• It can be utilized to perform undesirable work in dangerous or
hazardous environment and work requiring heavy physical
efforts.
• They are successfully implemented in nuclear industry for
carrying out the maintenance work on reactors and handling of
dangerous waste products.
 Industrial Applications of Robotics
Material Handling:
• Palletizing/Depallatizing
• Transporting components
Machine loading and unloading components:
• Spray painting
• Spot welding
• Forming
• Inspection
Application of robotics in other fields:
• Hazardous environments
• Medical
• Distribution
• Hobby/household purposes
• Military applications.
 AUTOMATES STORAGE AND
RETRIEVAL SYSTEMS
• It provides an efficient and effective production system for
manufacturing.
• Receiving, identification, sorting, patching, placing in storage,
packing, shipping, record keeping have been traditionally the
functions of a storage system.
• ASRS attempts to achieve these functions by automating most
of these procedures in a cost effective and efficient manner.
• It is defined as “A combination of equipment and controls,
which handles stores and retrieves materials with precision,
accuracy and speed under a defined degree of automation.”
DIFFERENT OPERATIONS OF ASRS:
• Automatic removal of an item from a storage location
• Transportation of the item to a specific processing point
• Automatic storage of an item in a predetermined location,
having received an item from a processing point

COMPONENTS OF ASRS:
• A series of storage aisles having storage racks
• Storage and retrieval machines, normally one machine per
aisle, to store and retrieve materials
• One or more pickup and delivery stations where materials are
delivered for entry to the system and materials are picked up
from the system.
 TYPES OF ASRS
• MINILOAD
• PERSON ON BOARD
• AUTOMATED ITEM RETRIEVAL SYSTEM
• UNIT LOAD
Unit load:
• Store and retrieve loads that are palletized or stored in
standard sized containers
• It is computer controlled; having automated machines to
handle unit load containers
• Each machine is guided by rails on the floor
• They are load supporting mechanisms that moves loads to
and from storage locations and pick up and deposit locations.
Mini load:
• It is designed to handle small loads such as individual parts,
tools and supplies.
• This is suitable for use where there is a limit on the amount of
space that can be utilized and where volume is too low for a
full scale unit load system and too high for a manual system.
Person-on-board:
• It allows storage of items in less than a unit load quantities.
• A person rides on a platform with the S/R machine to pick up
individual items from a bin or drawer.
• The operator can select the items and place them, in a
module which is then carried by the S/R machine to the end
of the aisle or to the conveyor to reach the destination.
Automated Item Retrieval System:
• This system is designed for automatic retrieval of individual
items or cases for storage
• The storage system consists of items stored individually in a
flow-through system that can be automatically released from
the storage and automatically brought to a required point.
AUTOMATIC GUIDED VEHICLE:
• AGV, also known as the battery powered driverless vehicle
• They are becoming an integral part of automated manufacturing systems
• It is for materials loading and un-loading throughout the facility
• AGV is the advanced material handling applications which not only
connect all faces of the factory by the horizontal movement of material,
but allow management to control and direct manufacturing processes.

COMPONENTS OF AGV:
• The vehicle: movement within system without operator
• The guide path: guides the vehicle to move along the path
• The control unit: it monitors and directs system operations including
feedback on moves, inventory
• The computer interface: it interfaces with other computers and systems
such as the mainframe host computer, ASRS and Flexible Manufacturing
systems.
 JUST-IN-TIME
• JIT is considered to be a production strategy which enables to identify the
non value added activities and eliminate those activities.
• The activities include the activities starting from the design to the delivery
of the product
• This system requires strong and dependable relationship with the
suppliers around the manufacturing facility, a reliable transport system
and easy accessibility to the distribution centers

Objective of JIT
• Produce only the products the customer wants.
• Produce products only at the rate that the customer wants them.
• Produce with perfect quality
• Produce with minimum lead time.
• Produce products with only those features the customer wants.
 Principles of JIT
• Flow layout
• Small lots and minimum set uptime
• Buffer stock removal
• Kanban Card
• Quality-Zero defects
• Production and process simplification
• Preventive maintenance
• Flexible workforce
• Continuous improvement
• Push and Pull systems
 KANBAN SYSTEMS
• A Kanban system is a means to achieve Just-in-time (JIT) production.
• It works on the basis that each process on a production line pulls just the number
and type of components the process requires, at just the right time.
• The mechanism used is a Kanban card. The word Kan means "card" in Japanese
and the word "ban" means "signal". So Kanban refers to "signal cards".
• It is a pull system of managing materials movement comprising of “Kanban card”
based information system
• It helps to trigger the movement of materials from one operation to another
• By altering the frequency of circulating the Kanban, the production system can be
made to adjust to the demand fluctuations within limits
• The number of Kanban cards in the system determines the total inventory.
• Hence, the objective is to minimize the number of Kanban.
TYPES OF KANBAN:
• A Withdrawal Kanban - specifies the kind and
quantity of product which a manufacturing
process should withdraw from a preceding
process.
• A Production-ordering Kanban - specifies the
kind and quantity of product which the
preceding process must produce. 
 WORKING OF KANBAN
• Kanban starts with the customer’s order and follows production
downstream. Because all requests for parts are pulled from the order, Kanban is
sometimes referred to as a "pull" system.
• To explain the Kanban concept, consider the case of an assembler who is drawing
a particular component from a pallet which, when full, contains 100 pieces.
• As the last piece is drawn, the assembler takes an identifying card from the empty
pallet and sends it back down the line to the earlier work centre where that part
(among others) is made.
• On receiving the Kanban card, the work centre responsible for supplying the
component makes a new batch of 100 and sends it to the assembly post ( so that
the assembler isn’t kept waiting, there will probably be an extra pallet in the
system to maintain the supply while the new batch is being made).
• This means that there is a minimum of paperwork, and the order cycle is
generated on a ‘pull’ basis, the components only being made when there is an
immediate need for them, thus keeping work-in-progress to a minimum.
 ABC SYSTEMS
• A.B.C. analysis is a selective technique of controlling different items of
inventory.
• In actual practice, thousands of items are included in business as
inventories. But all these items are not equally important.
• According to this technique, only those items of inventory are paid more
attention which is significant for business.
• ABC analysis is a business term used to define an inventory categorization
technique often used in materials management.
• ABC analysis provides a mechanism for identifying items which will have a
significant impact on overall inventory cost whilst also providing a
mechanism for identifying different categories of stock that will require
different management and controls.
• Here, all items are classified into 3 categories A.B. and C.
• In ‘A’ category those items are taken which are very
precious and their quantity or number is small.
• In ‘B’ category those items are reserved which are less
costly than the items of category ‘A’ but their number is
greater.
• In category ‘C’ all those items are included which are low
priced but their number is highest.
• The rate of use of items of category ‘A’ is the highest
and that of category ‘C’ is the lowest
 To conduct ABC analysis, following steps are necessary:
• 1. Collect previous year consumption and unit price for
each item
• 2. Multiply the consumption and unit price for each item
to get the consumption value       
• 3. Rank the items corresponding to the consumption value
• 4. Calculate cumulative consumption value against each
item
• 5. Find the percentage of cumulative consumption value.
 INDEPENDENT DEMAND
INVENTORY MODELS
• Independent demand - the demand for item is
independent of the demand for any other item in
inventory
• Independent demand items are finished products or
parts that are shipped as end items to customers.
• Independent demand items are unrelated to each
other and thus needed quantities for these
independent items must be determined separately
• Forecasting plays a critical role
 DEPENDENT DEMAND
• Dependent demand - the demand for item is dependent upon
the demand for some other item in the inventory
• The demand for one item is related to the demand for
another item
• Given a quantity for the end item, the demand for all parts
and components can be calculated
• Dependent demand items are raw materials, component
parts, or subassemblies that are used to produce a finished
product.
• For example, the demand for raw materials and components
can be calculated from the demand for finished goods
 FIXED ORDER QUANTITY MODEL
• This is also called as the Q system.
• Here, the order quantity is fixed and the ordering time varies
according to the fluctuations in demand.
• In other words, the same amount of inventory is replenished
in each order period.
CHARACTERISTICS:
• The re-order quantity is equal to the EOQ
• Depending upon the demand the time interval for ordering
varies
• Replenishment action is initiated when the stock level falls to
the re order level
• Safety stock is maintained to account for increase in demand
during lead time.
 Basic Fixed-Order Quantity Model and Reorder Point
Behavior
1. You receive an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
2. Your start using L L
them up over time. 3. When you reach down to a
Time level of inventory of R, you place
R = Reorder point your next Q sized order.
Q = Economic order quantity
L = Lead time
 FIXED PERIODIC REVIEW SYSTEM
• It is also called as fixed period ordering system or P system
• This system has fixed ordering interval but the size of order
quantity may vary with changes in demand
• The inventory position is verified at a pre fixed interval
(weekly, monthly, and quarterly) and the replenishment
action is initiated. (Diagram) in file
CHARACTERISTICS:
• Order level is fixed for individual item or group of items
• Stock is reviewed at periodic intervals and quantity Q which
will bring the inventory maximum level is ordered
 Economic Order Quantity (EOQ)
• The Economic Order Quantity (EOQ) is the number of units that a
company should add to inventory with each order to minimize the total
costs of inventory—such as holding costs, order costs, and shortage costs.
Also known as Economic Lot size.
• The EOQ is used as part of a continuous review inventory system, in which
the level of inventory is monitored at all times, and a fixed quantity is
ordered each time the inventory level reaches a specific reorder point.
• EOQ is when the cost of procurement =cost of carrying
• The EOQ provides a model for calculating the appropriate reorder point
and the optimal reorder quantity to ensure the instantaneous
replenishment of inventory with no shortages.
• It can be a valuable tool for small business owners who need to make
decisions about how much inventory to keep on hand, how many items to
order each time, and how often to reorder to incur the lowest possible
costs.
 EOQ-ASSUMPTIONS
– Demand is known & constant - no
safety stock is required
– Lead time is known & constant
– No quantity discounts are available
– Ordering (or setup) costs are constant
– All demand is satisfied (no shortages)
– The order quantity arrives in a single
shipment
ECONOMIC PRODUCTION LOT SIZE
MODEL
• The concept of Economic Batch Quantity is similar to EOQ,
where EOQ is applicable to production of finished goods
whereas the latter is applicable for the purchase of raw
materials, stores and spares.
• Used to determine the order size, production lot, if an item is
produced at one stage of production, stored in inventory, and
then sent to the next stage or the customer
• Inventory is replenished gradually as the order is produced
(which requires the production rate to be greater than the
demand rate).
• This model's variable costs are annual holding cost and annual
set-up cost (equivalent to ordering cost).
• For the optimal lot size, annual holding and set-up costs are
equal.
Assumptions
– Demand occurs at a constant rate of D items per
year.
– Production rate is P items per year (and P > D).
– Set-up cost: Co per run.
– Holding cost: Ch per item in inventory per year.
– Purchase cost per unit is constant (no quantity
discount).
– Set-up time (lead time) is constant.
– Planned shortages are not permitted.
 EOQ-QUANTITY DISCOUNT
MODEL
• The EOQ will sometimes change as a result of quantity discounts, which
are provided by some suppliers as an incentive for customers to place
larger orders.
• This model's variable costs are annual holding, ordering and purchase
costs.
• For the optimal order quantity, the annual holding and ordering costs are
not necessarily equal.
• A quantity discount is a price discount on an item if predetermined
numbers of units are ordered
• The basic EOQ model can be used to determine the optimal order size with
quantity discounts; however, the application of the model is slightly
altered. The total inventory cost function must now include the purchase
price of the item being ordered.
• To determine optimum quantity to order, EOQ is calculated for each unit
cost.
• If EOQ feasible, EOQ should fall within the respective quantity ranges.
Aggregate Production Planning
• Aggregate production planning (APP) determines the
resource capacity a firm will need to meet its demand
over an intermediate time horizon -- six to twelve
months in the future.
• The term aggregate is used because the plans are
developed for product lines or product families, rather
than individual parts.
• Aggregate planning provides a plan for allocating
resources, like labor and materials for production, and
space and time for services.
 Strategies for Meeting Demand
Consider a firm that has seasonal demand patterns. A
production plan for this firm has many options
available to manage the variations in demand. The
production can respond to the demand in any of the
following ways:
– Use inventory to absorb fluctuations in demand (level
production).
– Hire and fire workers to match demand (chase demand).
– Maintain resources for high demand levels.
– Increase or decrease working hours (over and under-time).
– Subcontract work to other firms and Use part-time workers
– Provide the service or product at a later time period
(backordering).
RESOURCE REQUIREMENT
PLANNING
• RRP refers to the planning of the overall capacities of
the firm. This is to validate the aggregate production
plans of the firm.
• RRP is directed at determination of the amount and
timing of production resources such as men, material,
and money and production capacity needed to
produce the finished products or the end items as per
the MPS.
• It is a long range planning.
 Master Production Schedule
• MPS is a plan for production, staffing, inventory etc; mostly
linked to manufacturing where the plan indicates when and how
much of each product will be demanded.
• MPS is a statement of planned production of finished products
that will meet the demand on time, within the organizations
capacity.
• It identifies significant processes, parts and other resources to
optimize production, identify bottlenecks and to anticipate the
needs and completed goods.
• It converts biz plan into production plan
• Aggregate plan……….dis-aggregation…….MPS
• It is developed from the forecasts, customer’s orders for end
items, safety stock requirements and internal orders.
Functions of MPS
• Translating aggregate plans
• Evaluating the alternative MPS
• Generating materials requirements
• Generating capacity requirements
• Facilitating info processing
• Effective utilization of capacity
 ROUGH CUT CAPACITY
PLANNING
• It is an aggregate planning tool to evaluate the work load that
MPS imposes either on all work centers or on selected key
centers
• This is done in conjunction with the tentative master schedule
to test the feasibility in terms of capacity before the MPS is
finalized.
• This is to ensure that the proposed MPS does not overload any
key department, work centre or machine.
• It is usually applied to the critical work centers which are most
likely to be the bottlenecks.
• It is a quick and inexpensive way to find and correct the
discrepancies between the capacity requirements of MPS and
the available capacity.
 MATERIALS REQUIREMENT
•
PLANNING
MRP is an integral part of production planning.
• For effective inventory control, production plans are converted into
material plans.
• It is a computer based production planning and inventory system.
• It is concerned with production scheduling and inventory control.
• MPR is a technique for determining the quantity and timing of the
acquisition of dependent demand items needed to satisfy Master
Production Schedule requirements.
Objectives of MRP:
• Ensure availability of materials, components and products for planned
production and for customer delivery.
• Maintain the lowest possible inventory.
• Plan manufacturing activities, delivery schedules and purchasing activities.
MRP SYSTEM
Bill of Materials:
• It is a file which gives the complete product descriptions and documents of
each component, part, and raw materials needed to make a product or sub
assembly.
• Also called as product structure tree. Draw them
Inventory Status Records:
• Item
• Supplier
• Lot size
• Safety stock
• Lead time
• On hand inventory
Outputs:
• A schedule of planned ordered releases
• Authorized order releases
• Change reports: revisions of order due dates, order quantities and inventory
level status
• Planning reports: info on inventory requirements, costs, capacity planning etc;
 CAPACITY REQUIREMENT
PLANNING
• CRP is a lower level planning. It is carried out with
the input of rough cut capacity planning.
• It is a computer based extension of MRP process that
uses the results of MRP along with detailed
production info and labour info to calculate the
planned workloads.
• It is a detailed capacity analysis that helps in
validating the MRP schedule.
• Thus it is a computerized system that projects load
from Materials Requirement plan.
CAPACITY PLANNING
 The broad classes of capacity planning are lead strategy, lag
strategy, and match strategy.
• Lead strategy is adding capacity in anticipation of an increase
in demand. Lead strategy is an aggressive strategy with the goal
of luring customers away from the company's competitors. The
possible disadvantage to this strategy is that it often results in
excess inventory, which is costly and often wasteful.
• Lag strategy refers to adding capacity only after the
organization is running at full capacity or beyond due to
increase in demand (North Carolina State University, 2006).
This is a more conservative strategy. It decreases the risk of
waste, but it may result in the loss of possible customers.
• Match strategy is adding capacity in small amounts in response
to changing demand in the market. This is a more moderate
strategy.
Shop Floor Control
• The system provided with information on how
many units were sent onwards on date as each
work centre completes the job.
• This enables the MRP system to provide each
work centre with daily notices of priority
changes
• Therefore, the shop floor control provides
information on the reschedules with the help
of which the existing schedules can be
updated.
Production Activity Control (PAC)
• It is concerned with converting plans to action,
reporting the results achieved and revising plans
and actions as required for achieving the desired
results.
• This converts the plans into actions by providing
the required direction.
• This requires proper planning of orders, work
force personnel, materials and capacity
requirements.
 EVOLUTION OF
MANUFACTURING RESORCE
PLANNING
CLOSED LOOP MRP SYSTEM
• MRP is useful but due to the problems that are
faced by the organization after its
implementation due to the lack of awareness of
other production related and business functions,
the org started adopting the Closed Loop MRP.
• This has made feedback possible by including
new functions such as file control, MPS, re-
scheduling actions and shop floor control.
 MANUFACTURING RESOURCE
PLANNING (MRP-II)
• MRP II is an integrated info system that synchronizes all the
aspects of business.
• MRP II system coordinates sales, purchasing, manufacturing,
finance and engineering by adopting a focal production plan
and by using one unified database to plan and update the
activities in all the systems.
• Manufacturing Resource Planning, also known as MRPII, is
based on combining Material Requirement Planning (MRP)
with Capacity Requirements Planning (CRP), with the
additional inputs from other computer systems within the
organization. MRPII is designed to widen the range of MRP to
allow financial and production planning.
• It is an extended form of closed loop MRP that also
incorporates strategic planning process, business planning and
no. of other functions in the organization.
MRP II can be divided into three parts:
• Top Mgt- Production planning functions
• Staff Units- Operations Planning
• Manufacturing line and staff supervisors-
operations control
The three divisions provide feedback
regarding the adequacy of overall resources,
completeness of resource commitments and
the quality of performance in carrying out the
plans.
BENEFITS OF MRP II
• Improved on time completion-better customer service
• Reduced inventories
• Provides capacity req. planning data
• Improved productivity-reduces over time
• Total business planning
DRAWBACKS:
• This system is very complex
• Involves more time and effort and commitment in all
levels of management
ENTERPRISE RESUOURCE
PLANNING
• It is a system which integrates all the processes
s and data of an organization.
• It uses the hardware and software to integrate
activities of manufacturing, supply chain,
financials, Customer Relationship Mgt,
Human Resources and warehouse mgt.
Advantages of ERP
• The fundamental advantage of ERP is that integrating the
myriad processes by which businesses operate saves time and
expense. Decisions can be made more quickly and with fewer
errors. Data becomes visible across the organization. Tasks
that benefit from this integration include:
• Sales forecasting, which allows inventory optimization
• Order tracking, from acceptance through fulfillment
• Revenue tracking, from invoice through cash receipt
• Matching purchase orders (what was ordered), inventory
receipts (what arrived), and costing (what the vendor invoiced)