MBA 2nd SEMESTER(DDE) Examination
Production and Operations management
Unit-1
Q.1 Distinguish between production to order and production to stock system .Which
type of system is used in service sector and why? explain
Ans. The transformation process that converts input into output with added value is the core
element in the operations function. A related consideration for process selection is whether the
product is to be produced and stocked in one warehouses, to be sold as and when the
demand occurs ,or is it to be produced only on receipt of an order from the customer. It is a
related consideration because usually standard products with less variety are produced in
batches and as sales proceed, company draw products from the inventory. When the
inventory level touches a predetermined minimum level ,a fresh batch of the product is
produced and such a cycle goes on. In this system, goods are produced in anticipation of
sales orders and the customer gets immediate delivery and does not have to wait however,
such a system can work only with inventorial products and the shorter the shelf life of a
product, the higher the risk undertaken by the producer for example newspaper have a very
short shelf life and so the risks of overproducing as well as under producing are high.
When the company uses produce to order concept, the production
process start after receiving the sales order in quantities declared by each sales order. All
custom-made products are produced to order since the exact specification are known only
after receipt of the order. In such a system the customer has to wait while his products are
being produced and so the longer the lead time for production, the longer the waiting period.
Services by their very nature cannot be inventoried and so services
have to be produced to order. The transformation process in such a system has to be
selected and designed that the waiting time for a customer is not excessive.
Finally there exists a combination of both these systems as well. For
example, where a large number of options are provided on the product, the components and
sub-assemblies might be produced to stock whereas the final assembly is carried out on
order. In restaurants, food is carried semi-cooked in batches, i.e produced to stock and the
final dish is prepared on receipt of a customer order i.e produced to order.
Q.2 What do you mean by facility layout? What are the characteristics of a good
layout? which type layout would you recommend for 1)a bank and (2)car
manufacturing plant? justify your answer.
Ans. Facilities layout refers to an optimum arrangements of different facilities including man,
machine, equipment, material etc since the layout once implemented cannot be easily
changed and costs of such a change is substantial, The facilities layout is a strategic decision.
A poor layout will result in continuous losses in terms of higher efforts for material handling,
more scrap and rework, poor space utilization etc.
Some of the important characteristics of a good plant layout are :(i)
(ii)
Overall simplification of production process in terms of equipment utilization,
minimization of delays, reducing manufacturing time and the better provision for
maintenance.
Overall integration of man, materials, machinery, supporting activities and any other
considerations in a way that result in best compromise.
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
minimization of material handling cost by suitability placing the facilities in the best
flow sequence.
saving in floor space, effective space utilization and less congestion/confusion.
increased output and reduced inventories-in-process.
better supervision and control.
worker convenience, improved morale and worker satisfaction.
better working environment, safety of employees and reduced hazards.
minimization of waste and higher productivity.
avoid unnecessary capital investment.
higher flexibility and adaptability to changing conditions.
There are four basic types of layouts. They are :-
(a) A process layout
(b) A product layout
(c) group technology or cellular layout
(d) fixed position layout
(e)
A process layout:- (also called job shop or fundamental layout) is a format in which similar
equipment or functions are grouped together , such as all lathes in one area and all stamping
machines in another A part being worked on then travels, according to the establishment
sequence of operations, from area to area , where the proper machines are located for each
operations. This type of layout is typical of hospitals and banks, for example, where areas are
dedicated to particular types of medical care, such as maternity ward, intensive care units, etc,
A product layout :- (Also called flow shop layout) is one in which equipment or work process
are arranged according to the progressive steps by which the product is made. The path for
each part is , in effect, a straight line. Production line for shoes, chemicals plants and car are
all product layouts.
A group technology (cellular) : A group technology layout groups dissimilar machines into
work centres (or cells ) to work on products that have similar shapes and processing
requirements. A group technology is similar to a process layout in that cells are designed to
perform a specific set of processes, and it is similar to a product layout in that the cells are
dedicated to a limited range of products.
Fixed position layout :- In this layout, the product (by virtue of its bulk or weight) remains at
one location, manufacturing equipment is moved to the product rather than vice-versa.
Construction sites etc. are the examples of this format.
Unit-II
Q3 Differentiate between product and process planning. Discuss in details the steps
involved in product selection.
Ans. Product planning concerns itself with modifications or extensions provided to ideas so as
to improve the functioning, the cost, the value-for-money of the product. Product planning
effort improves the performance of the product, adds options and additional features and even
adds variants of the basic product. On the whole, product planning effort is innovative vis-a-vis
research which is more inventive the thirst being on developing new product ideas,
technologies and processes.
Development efforts :- Product development starts after research has established an idea ,
which has been examined, evaluated and even refined. The development effort starts as the
performance of the product or service is improved and as the product itself graduates to the
growth phase of its products life cycle.
The development effort further continues but now the result is mainly providing options.
As the product reaches its maturity, the development effort has peaked and thereafter
gradually starts reducing. In this phase product variants are developed and offered so as to
lengthen the life cycle.
Product design :- At the design stage of product planning, detailed specifications are provided
so that manufacturing can produce what has been designed. This means that not only
providing dimensional specifications, but even specifications regarding capacity. Horsepower,
speed, color, etc. are laid down and the task of manufacturing is to convert the design into
physical entities.
There are two distinctly different priorities that can affect the design of a product
or a service. The higher the standardization, the greater will be the ease in producing. On the
other hand, customers have different needs and by adding variety, one can satisfy more
customers. Standardization attempts reduction in variety and better use of productive facilities,
thereby achieving lower cost units. If demand for the product or service is strong when the
price is low, organizations will try to minimize unit costs through standardization and most of
the competition will be based on prices. There are other cost related advantages due to
standerdization. It simplifies operational procedures and thus reduces the need for many
controls. The organization can buy raw materials and components in bulk and thus get quality
discounts. It enables steady flow of materials through work centres and thus reduces the
number of production set ups related to change in flow. It reduces the total inventory of raw
materials, work in process and finished goods. Finally, since the effective volumes become
larger as the variety is reduced , high volume production methods become viable thus giving
economics of scale in production itself.
At the same time, by adding variety, an organization attempts to satisfy the
varied needs and tastes of its customers and competitors on non-profit considerations as well.
On method used to obtain variety and yet hold down cost is through modularization. A product
is designed using modules or sub-assemblies that are interchangable and each different
combinations of modules gives a new variety of the product.
Process planning :- A process is any part of an organization that takes inputs and transfers
them into outputs that, it is hoped, are of greater value to the organization then the original
inputs. Process planning, refers to the strategic decision of planning which kind of production
processes to have in the plant. For example, if the volume is very low, a company might just
have a worker sit at a table and produce a small batch of assemblies. On the other hand, if the
volume is very high, setting up an assembly line might be appropriate.
For planning purpose, four major process flow structure have been identified
a) Job shop: production of small batches of a large number of different products, most of
which require a different set or sequence of processing steps.
b) batch shop: Essentially, a somewhat standardized job shop. Such a structure is generally
employed when a business has a relatively stable line of products ,each of which is produced
in periodic batches, either to customer order or for inventory. Most of these items follow the
same flow pattern through the plant.
c) Assembly line: Production of discrete parts moving from workstation at a controlled rate,
following the sequence needed to build the product. When other processes are employed in
a line fashion along with assembly, it is commonly referred to as a production line.
d) Continuous flow: Conversion or further processing of undifferentiated materials such as
petroleum, chemicals or beer. As on assembly lines, production follows a predetermined
sequence of steps, but the flow is continues rather than discrete. Such structures are highly
automated and, in effect, constitute one integrated “machine” that must be operated 24 hours
a day to avoid expensive shut downs and start ups.
The choice of which flow structure to select, with the exception of continuous flow
structures, is generally a function of volume requirements for each product.
The Product Selection Process
Product selection is an ongoing process in any organisation. As the environment
changes, as new technology is developed and as new tastes are formed, the product should
benefit from these developments; other wise what is perceived to have added value today may
not be perceived as such tomorrow. For example, Jute has been in use as a packing medium
for a long time. However, with changes in technology and consumer tastes, the same product
is no more perceived to have added value and therefore, its demand has reduced.
Product Selection Stages:The process of creating, selecting, developing and designing the output of an
organisation:
Pure Research
Marketing Research
Applied research
Idea Generation
Screening
Economic Analysis
Output development
Process Development
Design and Testing
Output possibilities are generated from many sources:
a) From the field itself through market research. This can take the form of consumer surveys,
dealer surveys, opinion polls etc.
b) From research laboratories: this can be due to a break through achieved by pure research
or applied research in developing new knowledge.
c) From conscious and formalized attempts to generate new ideas for products or services .
Using techniques like brainstorming, panel discussions, can generate these ideas
,scenario building ,technology forecasting etc.
The
output ideas thus generated are then screened where their match with corporate objectives
and policies is studied and their market viability is established .A detailed economic analysis
is then performed to determine the probable profitability of the product or service. For nonprofit organization, this takes the form of a cost-benefit analysis .This is followed by
development of the product or service from the concept to a tangible entity and finally by
design and testing .
Ques.4.] What is material requirement planning ? With the help of a hypothetical
example , show how materials requirement plans are prepared .
Ans. In manufacturing situations, the demand for raw materials, components, subassemblies,
and so forth is dependent on the production plan for the final product. It is there fore possible
to determine how many port or components will be needed in each future time period in the
planning horizon once we know the production requirements for the final product. Material
Requirement planning Methods exploit this information about dependence on demand in
managing inventories and controlling the production lot sizes of the numerous
parts that go in to the making of a final product. The managerial objectives in using materials
requirements planning is to avoid inventory stock outs so that production runs smoothly,
according to plans and to reduce investment in raw materials and work-in- Progress
inventories, The theme of MRP is Getting the right material to the right place at the right time
The philosophy of material requirement planning is that materials should be expedited
(hurried) when their lack would delay the overall production schedule, and de-expedited
(delays) when the schedule falls behind and postpones their need .Traditionally, when one
order is behind schedule , significant effort is spent trying to get it back on schedule. However,
the opposite is not always true; when an order, for what ever reasons, has its. completion
date delayed, the appropriate adjustments are not made in the schedule. This results in a
one-sided effort-later orders are hurried, but early orders. are not rescheduled for later. Aside
from perhaps using and work-in-process before the actual need because inventories He-up
finances, clutter up stockrooms, prohibit design changes and prevent cancellation or delay of
orders.
A Simple MRP Example
Suppose that we are to produce product J which is made of two parts U and
two parts X . Part V is made of two parts W and two parts Y, By simple calculations, we
calculate that if 100 units of T,. are required , we need.
T
4(2)
W(1)
V(3)
X(2)
Part u : 2x number of Ts = 2 x 100 = 200
Part v : 3x number of Ts = 3 x 100 = 300
Part w : 1x number of Us = 1 x 200
W(2)
)
Y(2)
+2 x number of Vs = +2 x 300
= 800
Part x : 2 x number of Us = 2x200 = 400
Part y : 2xnumber of Vs = 2x 300 = 600
Assuming that T takes one week to make ; U, two weeks ; U, 2 week; W, three weeks;
X, one week , and Y, one week . If we know when product T is required, we can create
A schedule chart specifying when all materials must be ordered and received to meet
The demand for T .
WEEK
1
Required date
Order
placement
U Required date
Order
placement
V Required date
Order
placement
W Required date
Order
placement
X Required date
Order
placement
Y Required Date
order
placement
2 3
4
5
6
T
100
7
100
T Lead Time = 1
week
200
200
U Lead Time = 2
weeks
300
300
V lead Time = 2
weeks
800
800
W Lead Time = 3
weeks
400
400
X Lead Time = 1
week
600
600
Y Lead Time = 1
week
UNIT-III
Ques5. What is mass production? Discuss in detail how planning and controlling is
done in mass production?
Ans. Mass production refers to the manner in which a product is produced. This involves the
decomposition of the total task into its minutest elements and the subsequent re-grouping of
these elements according to the norms of production. An assembly line consists of work
stations in sequence where at each work station the carefully designed portion of work is
done. Mass production requires that all like parts of the assembly line be interchangeable and
that all parts be replicable, characteristics which permits production and maintenance of large
quantities.
The assembly line is a production line where material moves continuously at a
uniform average rate through a sequence of work stations where assembly work is performed.
It is generally agreed that mass production is justified only when production
quantities are large and product variety small.
The ideal situation for mass production would be when large volumes of one
product (Without any change in design) are to be produced continuously for an extended
period of time.
Advantages of mass production:1) A smooth flow of material from one work station to the next in a logical order.
2) Since the work from one process is fed directly into the next, small in process
inventories result.
3) Total production time per unit is short.
4) Since the work stations are located so as to minimize distances between consecutive
operations, material handling is reduced.
5) Little skill is usually required by operators at the production line, hence training is
simple, short and inexpensive.
6) Simple production planning and control systems are possible.
7) Less space is occupied by work in transit and for temporary storage.
Disadvantages:1) A breakdown is one machine mat lead to complete stoppage of the line that follows the
machine. Hence maintenance and repair is a challenging job.
2) Since the product dictates the largest , changes in product design may require major
changes in the layout. This is often expressed by saying that assembly lines are
inflexible.
3) The pace of production is determined by the “slowest” or “bottleneck” machine. Line
balancing proves to be a major problem with mass manufacture on assembly lines.
4) Supervision is general rather than specialized, as the supervisor of a line is looking
after diverse machines on a line.
5) Generally high investments are required owing to the specialized nature of the
machines and their possible duplication in the line.
Planning and controlling:
Two most important manufacturing developments which led to
progressive assembly are the concept of the interchangeable parts and the division of labour.
These permit the progressive assembly of the product,as it is transported past relatively fixed
assembly stations ,by a material handling device such as a conveyer .the work elements
which have been established through the division of labour principle are assigned to the work
stations so that all stations nearly have an equal amount of work to do.each worker,at his or
her station,is assigned certain of the work elements.the worker performs them repeatedly on
each production unit as it passes the station.
The assembly line balancing problem is generally one of the minimizing the total amount of
idle time or equivalently minimizing the number of operators to do a given amount of work at a
given assembly line speed. This is also known as minimizing the balance delay.this is also
known as minimizing the balancing delay .this is also known as minimizing the balance delay.
”Balance delay” is defined as the amount of idle for the entire assembly line as a fraction of the
total working time resulting from unequal task time to the various stations
Depending upon the desired production rate of the line,the cycle
time (CT) or the time between the completion of two successive assemblies can be
determines. This determines the conveyer speed in each assembly line or the time allowed to
each operator to complete his share of work in a manual line.
The individual work elements or tasks are then grouped in to work stations such
that
1) The station time(st) :which is the sum of the times of work elements performed at that
station and should not exceed the cycle time,ct
II) the precedence restrictions implied by the precedence diagram are not violated
(the total job to be done or the “assembly” is divided in to work elements. .A diagram
that describes the ordering in which work elements should be performed is called precedence
diagram)
There are many possible ways to group these tasks keeping the above
restrictions in mind and we often use criteria like line efficiency balance delays and
smoothness index to measure how good delays and index to measure how good or bad a
particular grouping is .this criteria are
1)Line efficiency(LE): this is the ratio of total station time to the product of the cycle time and
the number of work stations.this is expressed
LE =
[sigma (i=1 to k) STi / (k)*(CT)]*100%
_____________________
Where sti=station time of station I
K =total number of stations
Ct=cycle time
2)Balance delay(BD) : This is a measure of the line inefficiency and is the total idle time of all
stations as a percentage of total available working time of all stations.thus
BD=[k)*(CT)-sigma(I=1 to k) STi /(k) (CT)]*100%
Balance delay is thus(100-le)as a percentage
3) Smoothness index (SI) this is an index to indicate the relative smoothness of a given
assembly line balance. A smoothness index 0 indicates a perfect balance. This can be
expressed as
SI = [(sigma(I=1 to k) (Stmax - STi ))2]1/2
Where Stmax = maximum station time
STi
= station time of station I
K
= total number of work stations
In designing an assembly line the number of work stations k cannot exceed the total number
of work elements,N.Also the cycle time is greater than or equal to the maximum time of any
work element and less thab the total of all work element times that is
Where ti is the time for work element I .
N total no of work elements
Tmax is the maximum worl element time
Ct is a cycle time
Question N0.6:-> Where is the objective of work measurement ?Discuss time study and
work sampling techniques of work measurement ?
Answer:->
Work measurement is defined as the application of techniques designed to establish
the work content of a specified work tasks by determining the time required for carrying it out
at a defined standard of performance by qualified worker.
The fundamental purpose of work measurement is to set time standards for a job .
Such standards are necessary for four reasons
1. To schedule work and allocate capacity .all scheduling approaches require some
estimate of how much time it takes to do the work being schedule.
2. To provide an objective basis for motivating the workforce and measuring
workers performance. Measured standards are particularly critical where out put
based insensitive plans are employed
3. To bid for a new contacts and to evaluate performance on existing ones
4. To provide bench marks for improvement .in addition to internal evaluation ,
bench marking items regularly compare works standards in their company with
those of similar jobs in other organization.
There are two common techniques for measuring work and setting
standards. Time study and work sampling.
The choice of techniques depend upon level of detailed desired
and the nature of work itself. Highly detailed , repeated work
usually calls for time study analysis .when work is infrequent or
entails a long cycle time , work sampling is tool of choice .
A time study is generally made with the stop watch either on the
stop watch , either on the spot or by analyzing a video tape for the job .The job or task to be studied is
separated into measurable parts or elements , and each element is time individually
Some general rules for breaking down the elements are
1.Define each work element to be short in duration but long enough so that it can be timed with a stop
watch and the time can be written down.
2.if the operators work with equipment that run separately(meaning the operator performs a task and
the equipment runs independently ), separate the actions of the operators and of the equipment into
different elements .
3.Define any delays by the operator or equipment into separate element.
After a no. of repetitions the collected items are averaged .The averaged items for
each element are added ,yielding the performance time for the operator., However ,to make
operator time usable for all workers , a measure of speed or performance rating must be
included to normalize the job. The application of rating factor gives what is called normal time
. for example if an operator performs a task in two minutes and the time study analysts
estimates her to be performing about 20 percent faster than normal , the operator performance
rating time would be computed as two minutes * 1.2 or 2.4 minutes .in equation form .
Normal time =observed performance time per unit * performance
rating .
When a operator is observed for a period of time , the no of units
produced during this time , along with the performance rating gives
NT = (Time worked/ Number of units produced)*performance rating
Standard time:-> Is derived by adding two normal time
allowances for personnel needs such as wash room and coffee breaks , unavoidable work delays such
as equipment breakdown or lack of material and worker fatigue(physical or mental).
Hence, standard time=normal time + (allowances * normal time)
Or
ST = NT (1+Allowances)
Therefore, ST = NT/(1-allowances)
A second common technique for measuring a job is called work sampling. Work sampling
involves observing a position or sample of the work activity. Then , based on the finding in this
sample. Statements can be made about the activity. Three primary application for work
sampling are
1
ratio delay to detrerm8ine the activity time percentage for personnel or equipment.
For example , management may be interested in the amount of time a machine is
running or idle.
2
Performance measurement to develop a performance index for workers. When the
amount of work time is related to the quantity of output, a measure of performance
is developed . this is useful for periodic performance evaluation.
3
Time standard to obtain the standard time for a task. When work sampling is used
for this purpose, however the observer must be experienced person because he or
she must attach a performance rating to the observation.
The number of observations required in a work study sampling study can be fairly large,
ranging from several hundred to several thousand depending on the activity and desired
degree of accuracy.
Five steps are involved in making work sampling study.
1 Identify the specific activity or activities that are the main purpose for the study. For
example, determine percentage of time that equipment is working , idle or under repair.
2 Estimate the proportion of time of the activity of interest to the total time. (example that
the equipment is working 80%of the total time) these can be made from the analyst ‘s
knowledge , past data, reliable guesses from others , as a pilot work sampling study.
3 State the desired accuracy in the study results.
4 Determine the specific times when each observation is to be made.
5 At two or three intervals during the study period, recomputed the required sample size
by using the data collected thus far.
The number of observations to be taken in a work sampling study is usually divided equally
over the study period. Thus , if 500 observations are to be made over a 10 day period,
observations are tot be made over a 10 day period, observations are usually scheduled at
500/10 or 50 per day . each day’s observation are then assigned a specific time by using a
random number table.
Ques 7 What is inventory management ? what are its objectives? Discuss an y two
techniques used to reduce inventory costs. Also explain how these techniques
reduce these costs?
Ans Inventory is the stock of any item or resource used in an organization. An inventory
system is the set of policies and controls that monitor levels of inventory and determine
what levels should be maintained, when stock should be replenished, and how large orders
should be.
By convention, manufacturing inventory generally refers to items that contribute to or
become part of firm ‘s product output. Manufacturing inventory is typically classified into
raw materials, finished products, component parts, supplies and working progress. In
services inventory generally refers to the tangible goods to be sold and the suppliers
necessary to administer the service.
The basic purpose of inventory analysis in manufacturing and stock keeping services is
to specify
1 when items should be ordered and
2 how large the order should be .
Inventory management deals with the determination of optimal policies and procedures for
procurement of commodities. Since it is quite difficult to imagine a real work situation in
which the required material will be made available at the point of use instantaneously
hence maintaining inventories become almost necessary . thus inventories could be
visualized as necessary evil.
Scientific inventory management is and extremely important problem area in the
materials management function. Materials account for more than half the total cost of any
business and organizations maintain huge amount of stock much of this could be reduced
by following scientific principles. Inventory management is highly amenable to control. In
the Indian industries there is a substantial potential for cost reduction due to inventory
control inventory being a symptom of poor performance, we could reduce inventories.
An inventory system may be defined as one in which the following costs are significant.
1 Holding (or carrying cost) This category include the cost for storage facilities , handling ,
insurance , pilferage . breakage and opportunity coast for capital . High inventory cost
tend favour low inventory levels and frequent replenishment.
2 Setup (or production change) costs To make each different product involves obtaining
the necessary material, arranging specific equipment setups , filling out the required
papers , appropriately charging time and materials and moving out the previous stock of
material.
If there were no cost or loss of time in changing form one product to another ,
many small lots will be produced. This would reduced the inventory levels with a
resulting saving in costs. To permit smaller lot sizes.
3 Ordering costs These costs refers to the managerial and clerical costs to prepare the
purchase and production order. Ordering cost include all the details, such as counting
items and calculating all the details, such as counting items and calculating order
quantities. The costs associated with maintaining the system needed to track order are
also included in ordering costs.
4 Shortage costs When the stock of an items is depleted an order for that item must
either wait until the stock is replenished or be cancelled . there is a trade off between
carrying stock to satisfy demand and the costs resulting from stock out. This balance is
sometimes difficult to obtain, because it may not be possible to estimate lost profits, the
effects of lost customers cost is little more than a guess, although it is usually possible
to specify a range of such costs.
Establishing the correct quantity to order from vendors or the size of lots submitted to the
firm’s production facilities involves a search for the minimum total cost resulting from the
combined efforts of four individual costs : holding costs, setup m, ordering costs and shortage
cost .
Two techniques that can be used to reduce inventory costs :
A) Economic order quantities
B) ABC analysis
Economic order quantity:
This
is
the
most
classical
of
the
inventory
models
and
also known as Wilson’s lot size formula. When dealing with stocked items, the two
Important decisions to be made are –how much to order and when to order .EOQ
[Economic order Quantity] attempts to provides the answer to former while the
Reorder point [ROP] provides the answer to the later.
is
The following assumption are made in the standard Wilson lot
size formula to obtain EOQ
A] Demand is continuous at a constant rate
B] The process continues infinitely.
C] No constrains are imposed on quantities ordered, storage capacity, budget etc.
D] Replenishment is instantaneous [the entire order quantity is received all at order
Is released ]
E] All cost are time- invariant .
F] No shortages are allowed
G] Quantity discounts are not allowed.
Let
D] = Demand rate ; unit per year
A] = Ordering cost; Rs/ order .
C] = Unit cost , per unit of item.
R ] = Inventory / unit item =r .c
T C =Total annual cost of operating the system Rs/ year
[objective function]
Q = Order Quantity . Number of units per lot [ decision variable]
Since demand is at uniform rate average inventory is Q/2 Throughout
The year and the total number of orders are [D/Q] per year. Thus total
Annual cost of operating the systems consisting of carrying cost and
Ordering cost of operating cost can be written as ;
Due to convex nature of total cost curve , it is obvious that
Q [EOQ] gives the global minimum total cost. It can also be seen that
EOQ is obtained at the point of intersection of ordering cost and carrying cost.
It can be concluded that
A] If ordering cost is of high EOQ thus raising average inventory
Level.
B] If r or c are high leading to high valve of H, the tendency will be to go
For smaller lot sizes.
A B C Analysis
Depending up on the value, criticality and usage frequency
Of an item a company may have to decide on an appropriate type of
Inventory policy. ABC Analysis is based on a universal pareto’s law
That in any large number we have significant few an insignificant many. For example, only
20% of the items may be accounting for the 80% of the total material cost annually. These are
significant few which require atmost attention .
Annual usage of demand multiplied by unit price thus gives monitory worth of annual
consumption .For example 10% items may be claiming 75% of the annual usage value and
thus constitute the “Significant few” . They are called A class items. Another 15% account for
another 15% of the annual usage value and are called B class item. A vast majority of 75%
items account for only 10% expenditure on material consumption and constitute “Insignificant
Many” and are called C class items. To prepare an ABC type curve we may follow the
following simple procedures
i)
Arrange items in the descending order of the annual usage value
Annual usage value = Annual Demand * Unit Price
A very simple empirical Way to classify items may be adopted as follows
Average Annual Usage Value X = Total material cost per year/ Total no. of items
Once the items are grouped into A,B and C category , a company can adopt
different degree of seriousness in an inventory control efforts. Whereas, B class
items may have relaxed control and C class items may be procured using simple
rules of thumb, as usual.
Q8 Construct control charts for mean and range for the following data on
measurement (in cms.)
1
2
3
4
9.85
10.20 10.30 10.30 9.98
10.30 10.30 10.30
10.40 10.25 9.90
10.10 10.20 10.10 9.90
10.10 10.20 10.40
10.60 9.98
5
6
7
8
9
10
10.30 10.05 10.20 10.30 10.24 10.20 10.20 10.40 10.60 10.50
9.90
10.35 10.25 9.90
10.20 10.33 10.15 9.95
10.50 10.10 10.40 10.24 10.50 10.10
10.30 9.90
10.10 10.30 10.10 10.20
Is the process under control?
(for n=5; A2 = 0.58, D4 = 2.11 and D3 = 0)
Ans.
S.No.
Each Unit in sample
Average X
Range
1.
10.60 10.40 10.30 9.90 10.20
10.28
.70
2.
9.98 10.25 10.05 10.23 10.33
10.17
.35
3.
9.85 9.90
10.20
10.25 10.15
10.07
.40
4.
10.20 10.10 10.30 9,90
9.95
10.09
.40
5.
10.30 10.20 10.24 10.50 10.30
10.31
.30
6.
10.30 10.10 10.20 10.10 9.90
10.12
.40
7.
9.98
9.90
10.20 10.40 10.10
10.12
.50
8.
10.30 10.10
10.40 10.24 10.30
10.27
.30
9.
10.30 10.20 10.60 10.50 10.10
10.
10.30 10.40 10.50 10.10 10.20
10.34
.50
10.30
.40
X=10.20
R=0.42
Upper control limit for X = X + A2R =10.20 +( 0.58 * 0.42 ) = 10.44
Lower control limit for X = X - A2R =10.20 -( 0.58 * 0.42 ) = 9.96
Upper control limit for R = D4R = 2.11 (0.42) = 0.88
Lower limit for R = D3R = 0 * (0.42) = 0
The highest X in the table ( sample no. 9) is 10.34 which is less than the upper control
limit of 10.44
The lowest X in the table (sample no. 3 ) is 10.07 which is above lowest control
limit of 9.96
The highest value of R (sample no. 1) is 0.70, which is less than upper control limit for
R that is 0.88.
The lowest value of R (sample no. 5 and 8) is 0.30, which is more than the lowest
control limit of 0.
Hence, all the points are within the control limits.
Thus, the process is under control.