Class 5

Class 5 – SCM (Prof. Suhas Rane)

JIT – just in Time – adopted from Piggly Wiggly

JIT works only when there is less fluctuation in production (+-5%). JIt exposes those problems in production line which is hidden by safety stock.

Advantages –

· Risk of obsolescence of product is mitigated (reduces holding cost)

· Reduces storage cost – Less warehouse required for finished goods / raw materials

· Reduces delivery cost – as finished goods are directly supplied to selling / consumption place rather than ware-houses

· Small supplier can fulfill large orders in small lots with more frequent supply

EOQ (economic order quantity)

How to control ordering cost –

1) Fast paper work – Time is usually wasted for deciding whether to order or not

2) Inspection – history of inspection

a. Inspection days – Rivalry among inspector and workers; no coordination between them

b. Quality control – Inspector now advices the operator

c. Quality assurance – It is inspector’s responsibility to ensure quality of the final product. Hence, now he can command the operator.

d. TQM (Total quality management) – Inspector is eliminated. Operator is the inspector himself. Supervisor will only do surprise checks.

3) Cross docking – To reduce / eliminate steps of receiving and inspection

How to control inventory carrying cost –

1. Reduce inventory

2. Better negotiation with banks for loan for getting storage space

Self certification – Vendor gives a written guarantee that he / she is responsible for the quality of their product. Buyer approves this from time to time.

Vendor / ancillary development department – Company buys from many vendors rather than one to reduce the dependency. This also aims to reduce the unit cost.

Sensitivity of the EOQ model – The EOQ curve (total cost line) is more flat on the right side. Hence, change in price wrt quantity is more on the left side than on the right.

Reordering –

P type – Period based ordering / cyclical ordering – The new graph of consumption is less steeper than normal consumption.

Q type – Quantity based ordering / perpetual inventory record – here ordering is done at re-order point. Here, the graph / hypotenuse of the triangle is much steeper than the normal slope of consumption .

Safety stock (SS) – Only takes care of consumption during lead time (time between ordering and arrival of goods)

SS = Z (Safety factor) * Std Dev * Sqrt (Lead Time)

Here, Z is safety factor which is always greater than 1.

Values of Z –

At 90%, Z = 1.285

At 92%, Z = 1.41

At 95%, Z = 1.65

At 99%, Z = 2.33

MRP System –

1. Level 1 – EOQ – Economic order quantity – Only costing of 1 item is considered

2. Level 2 – MRP-1 – Material requirement planning – More than 1 item is considered for minimum costing

3. Level 3 – MRP-2 – Manufacturing resource planning – Apart from costing of materials, maintenance is also considered here

4. Level 4 – ERP – Enterprise resource planning – It includes SAP where costing is calculated on company’s level

5. Level 5 – SCM – Supply chain management – here all the level / stakeholders of supply chain is considered for costing

MRP1 = +(Bill of material * Master production schedule) – Opening stock + Desired closing stock at the month end (what is expected stock to be saved at month end)

*Master production schedule – how much finished product to be produced and by what date

ABC (always better control) – Looks from financial perspective

20% of vendor gives me 80% of business (higher margin obtained from these vendors)

· A = comprises of 5%-10% by quantity, high value of goods / provides highest margin to the company

· B = 10%-20% quantity

· C = 70%-80% quantity

A item needs tighter control on buying, C items usually comprises of MRO (Maintenance, repair, office) items and needs least tighter control

X –Axis = % by units

Y – Axis = % by value

Total Value = Rate * Quantity (rate is highest for A and quantity is highest for C)

Central storage for risk pooling – for ‘A’ category items

VED – Vital essential desirable (sees from manufacturing and purchase point of view)

· Vital – Washer is a C- category item (least costly), but more critical if not present (as it will hault the entire production line)

· Desirable – Music system is costly item in a car, hence, A category item. But is a desirable part as its absence will not affect the car production

Cooperative round robin pickup system – Pick supplies from all vendors in 1 shot (Ex – Ford). Here, the ware-house of vendors is near the factory premises.

Traditional view of manufacturing – Use full capacity of the plant, even if excess output is generated.

Let’s look at costs

· 12% - 14% is manpower cost (which is fully utilized above)

· 60% is material cost (includes storage and buying cost)

Hence, there is a chance of trade off where manpower is kept idle (including machine), but material is only purchased which can be sold in the market – Current concept