1. Material Productivity By T. A. Khan January 2008

4. RM Productivity Raw materials productivity Output (value or unit or value added) Value of Raw material used How to Increase? = Efforts to reduce the cost of input materials.

5. Material productivity Reduce scrap or waste so that a higher percentage of the raw materials is utilised. Reduce scrap or waste so that a higher percentage of the raw materials is utilised. Use of non corrosive materials or coatings to increase product life. (e.g. Bridges, highways & tools etc.) Use of non corrosive materials or coatings to increase product life. (e.g. Bridges, highways & tools etc.) Reduce inventories to get higher returns per unit of inventory item. Reduce inventories to get higher returns per unit of inventory item.

6. Cost of Input Materials Reduce the actual quantity of materials used per unit of the finished product. Reduce the actual quantity of materials used per unit of the finished product. Improve product design. Improve product design. Improve manufacturing processes to: Improve manufacturing processes to: Enhance product quality Enhance product quality Reduce material waste. Reduce material waste. Improve Supplier’s processes Improve Supplier’s processes Reduce inventory costs. Reduce inventory costs.

7. What is Inventory? Stock of materials Stored capacity Examples

8. The Functions of Inventory To provide a stock of goods that will provide a “selection” for customers To provide a stock of goods that will provide a “selection” for customers To take advantage of quantity discounts To take advantage of quantity discounts To hedge against inflation and upward price changes. To hedge against inflation and upward price changes. Protect against shortages Protect against shortages WIP decouples production stages WIP decouples production stages

9. The Functions of Inventory Independence of operations Independence of operations Decouple production & distribution Decouple production & distribution permits constant production quantities permits constant production quantities Variation in demand Variation in demand Flexibility in scheduling Flexibility in scheduling Supply (lead-time) variability Supply (lead-time) variability Economic purchase order size Economic purchase order size

10. Disadvantages of Inventory Higher costs Higher costs Item cost (cost of the item) Item cost (cost of the item) Ordering (or setup) cost Ordering (or setup) cost cost of forms, clerk’s wages, EDI system cost of forms, clerk’s wages, EDI system Holding (or carrying) cost Holding (or carrying) cost Building lease, insurance, money tied up Building lease, insurance, money tied up Difficult to control Difficult to control Hides production problems Hides production problems

11. Types of Inventory Raw material Raw material Work-in-progress Work-in-progress Maintenance/repair/operating supply Maintenance/repair/operating supply Finished goods Finished goods Defectives Defectives Returns Returns

12. Performance and WIP Level Less WIP means products go through system faster Less WIP means products go through system faster reducing the WIP makes you more sensitive to problems, helps you find problems faster reducing the WIP makes you more sensitive to problems, helps you find problems faster Stream and Rocks analogy: Stream and Rocks analogy: Inventory (WIP) is like water in a stream Inventory (WIP) is like water in a stream It hides the rocks It hides the rocks Rocks force you to keep a lot of water (WIP) in the stream Rocks force you to keep a lot of water (WIP) in the stream

13. Lowering Inventory Reduces Waste WIP hides problems

14. Lowering Inventory Reduces Waste WIP hides problems

15. Lowering Inventory Reduces Waste Reducing WIP makes problem very visible STOP

16. Lowering Inventory Reduces Waste Remove problem, run With less WIP

17. Lowering Inventory Reduces Waste Reduce WIP again to find new problems

18. The Material Flow Cycle

19. 1 Run time: Job is at machine and being worked on 2 Setup time: Job is at the work station, and the work station is being "setup." 3 Queue time: Job is where it should be, but is not being processed because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory. Other Wait Time Move Time Queue Time Setup Time Run Time Input Cycle Time Output

20. Inventory Costs Holding costs - associated with holding or “carrying” inventory over time Holding costs - associated with holding or “carrying” inventory over time Ordering costs - associated with costs of placing order and receiving goods Ordering costs - associated with costs of placing order and receiving goods Setup costs - cost to prepare a machine or process for manufacturing an order Setup costs - cost to prepare a machine or process for manufacturing an order

21. Holding (Carrying) Costs Obsolescence Obsolescence Insurance Insurance Extra staffing Extra staffing Interest Interest Pilferage Pilferage Damage Damage Warehousing Warehousing Etc. Etc.

22. Inventory Holding Costs Category% of Value Housing (building) cost6% Material handling3% Labor cost3% Opportunity/investment11% Pilferage/scrap/obsolescence3% Total Holding Cost26%

23. Shrinkage Costs How much is stolen? How much is stolen? 2% for discount, dept. stores, hardware, convenience, sporting goods 2% for discount, dept. stores, hardware, convenience, sporting goods 3% for toys & hobbies 3% for toys & hobbies 1.5% for all else 1.5% for all else Where does the missing stuff go? Where does the missing stuff go? Employees: 44.5% Employees: 44.5% Shoplifters: 32.7% Shoplifters: 32.7% Administrative / paperwork error: 17.5% Administrative / paperwork error: 17.5% Vendor fraud: 5.1% Vendor fraud: 5.1%

24. ABC Analysis Divides on-hand inventory into 3 classes Divides on-hand inventory into 3 classes A class, B class, C class A class, B class, C class Basis is usually annual $ volume Basis is usually annual $ volume $ volume = Annual demand x Unit cost $ volume = Annual demand x Unit cost Policies based on ABC analysis Policies based on ABC analysis Develop class A suppliers more Develop class A suppliers more Give tighter physical control of A items Give tighter physical control of A items Forecast A items more carefully Forecast A items more carefully

25. Classifying Items as ABC A B C % Annual $ Usage % of Inventory Items

26. Ordering Costs Supplies Supplies Forms Forms Order processing Order processing Clerical support Clerical support Etc. Etc.

27. Setup Costs Clean-up costs Clean-up costs Re-tooling costs Re-tooling costs Adjustment costs Adjustment costs Etc Etc

28. Inventory Models Fixed order-quantity models Fixed order-quantity models Economic order quantity Economic order quantity Production order quantity Production order quantity Quantity discount Quantity discount Probabilistic models Probabilistic models Fixed order-period models Fixed order-period models

29. EOQ Assumptions Known and constant demand Known and constant demand Known and constant lead time Known and constant lead time Instantaneous receipt of material Instantaneous receipt of material No quantity discounts No quantity discounts Only order (setup) cost and holding cost Only order (setup) cost and holding cost No stockouts No stockouts

30. Inventory Usage Over Time Time Inventory Level Average Inventory (Q*/2) 0 Minimum inventory Order quantity = Q (maximum inventory level) Usage Rate

31. EOQ Model How Much to Order? Order quantity Annual Cost Holding Cost Curve Total Cost Curve Order (Setup) Cost Curve Optimal Order Quantity (Q*) Minimum total cost

32. EOQ Model Equations Optimal Order Quantity Expected Number of Orders Expected Time Between Orders Working Days/Year Working Days/Year == ×× == == = =× Q* DS H N D Q*Q* T N d D ROPdL 2 D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days

33. Material productivity Raw materials productivity Output (value or unit or value added) Value of Raw material used = Value of Raw Material used. Value of Perfect Requirement Value of waste Improve Product Design Inventory Costs Improve Manufacturing Process Improve Material Quality Optimize Inventory carrying Costs Optimize Inventory Ordering Costs

35. ABC Classification Solution Stock #Vol.Cost$ Vol.%ABC 20626,000$ 36$936,000 105200600120,000 0192,00055110,000 14420,000480,000 2077,0001070,000 Total1,316,000

36. ABC Classification Solution

37. Deriving an EOQ 1. Develop an expression for setup or ordering costs 2. Develop an expression for holding cost 3. Set setup cost equal to holding cost 4. Solve the resulting equation for the best order quantity

38. Why Holding Costs Increase Purchase Order DescriptionQty. Microwave1 Order quantity Purchase Order DescriptionQty. Microwave1000 Order quantity  More units must be stored if more are ordered

39. Why Order Costs Decrease Purchase Order DescriptionQty. Microwave1 Purchase Order DescriptionQty. Microwave1 Purchase Order DescriptionQty. Microwave1 Purchase Order Description Qty. Microwave 1 1 Order (Postage $ 0.33)1000 Orders (Postage $330) Order quantity Purchase Order Description Qty. Microwave1000

40. EOQ Model (When To Order) Reorder Point (ROP) Time Inventory Level Average Inventory (Q*/2) Lead Time Optimal Order Quantity (Q*)

41. The Reorder Point (ROP) Curve Q* ROP (Units) Slope = units/day = d Lead time = L Time (days) Inventory level (units)

42. Sample Problem 1 Assume you have a product with the following parameters: Assume you have a product with the following parameters: Annual Demand = 360 units Annual Demand = 360 units Holding cost = $1.00 per unit Holding cost = $1.00 per unit Order cost = $100 per order Order cost = $100 per order What is the EOQ for this product? Assuming a 300-day work year, how many orders should be processed per year? What is the expected time between orders? What is the EOQ for this product? Assuming a 300-day work year, how many orders should be processed per year? What is the expected time between orders?

43. Problem 2 Solution