Inventory Control Learning Objective: To know the meaning, types and functions of inventories Meaning of Inventory: The word inventory refers to any kind of resource having economic value and is maintained to fulfil the present and future needs of an organization. Fred Hansman has defined Inventory as “An idle resource of any kind provided such a resource has economic value”. Such resources may be classified into three categories: A. Physical resources such as raw materials, semi-finished goods, finished goods, spare parts, lubricants etc. B. Human resources such as unused labor (man power) and C. Finance resources such as working capital etc. Inventory of resources is held to provide desirable service to customers and to achieve sales turnover target. At the same time holding big inventory severely affects the cash flow and working capital of an organization if the production vs demand cycle is not stream-lined. Because inventory often represents more than 25% of total assets and therefore it becomes very essential to maintain an optimal level of inventory in each resource so that the total inventory cost is near its minimum. Functions of Inventory: Inventory serves several important functions that add flexibility to the operations of a firm. Provides stock of goods to meet the anticipated demand of customers. In the case of consumer goods with a seasonal demand, the establishment of inventories in distribution and production warehouses also ensures that production can run continuously at full capacity despite swings in seasonal demand. De-Coupling function: The down time in one manufacturing stage should not affect the whole manufacturing process and this vital purpose is solved by holding inventory which acts as a buffer between successful stages of production. Quantity Discounts: Many suppliers offer QD’s for large orders of inventory. Procurement warehouses can result from a company’s desire to get volume discounts from a supplier or more favorable conditions from a carrier. Price speculation – Inventory also helps to hedge against inflation and price changes. Inventories of procurement and distribution warehouses are increased if the price of a good is expected to rise. In such a situation, the purchasing company aims to amass the good at the current low price. The supplier may speculate that supply shortages will drive the prices higher, and he uses the warehouse to store the good. Shortages can occur regularly due to irregular supply of raw materials, weather, quality problems or improper deliveries. Inventory shall act as “safety stock’ – extra goods on hand which reduce the risk of stock-outs. Helps to permit operations to continue smoothly with the use of “work in process” inventory. This is because it takes time to make goods and because a pipeline inventory is stocked through-out the process. JUST IN TIME MANUFACTURING CONCEPT Types of Inventory: Inventory can be classified according to the basis of type of material maintained in the firms and also on the basis of the functions they tend to perform in an organization. On the basis of type of material, the firms maintain four types of inventories: Raw material inventory Work in process inventory Maintenance/operating supply (MRO) inventory and Finished goods inventory Raw material inventory is the one which has been purchased and yet to be processed. The work in process material has undergone some change but is not completed. Work in process exists because of the time it takes for a product to be made which is called the “CYCLE TIME.” MRO inventory is devoted to maintenance/repair/operating supplies. They exist because the need and timing for maintenance and repair of some equipment are unknown. Products completed and waiting for shipment are called finished goods inventory. Finished goods may be inventoried because customer demand for...

What is Supply Chain Management? Investopedia: Supply chain management (SCM) is the streamlining of a business’ supply-side activities to maximize customer value and to gain a competitive advantage in the marketplace. SCM represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Wikipedia: Supply chain management (SCM) is “the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.” Business Dictionary: Management of material and information flow in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost. SCM requires the commitment of supply chain partners to work closely to coordinate order generation, order taking, and order fulfillment. They thereby create an extended enterprise spreading far beyond the producer’s location. 7 Principles of SCM Supply Chain Management in Simpler Terms: The EFFECTIVE movement and management of materials and information as they flow from their source to the end customer. Supply Chain encompasses purchasing, manufacturing, warehousing, transportation, customer service, demand planning and supply planning. SCM is a daunting task and calls for proper planning and execution. OBJECTIVES OF FORECASTING SCM is the control of the supply chain as a process from supplier to manufacturer to wholesaler to retailer to consumer. SCM does not  only comprise  the passage of a physical product  through the chain but also any data that goes along with the product (such as order status information, payment schedules, and ownership titles) and the actual entities that handle the product from stage to stage of the supply chain. There are essentially three goals of SCM: To reduce inventoryTo increase the speed of transactions with real-time data exchange andTo increase revenue by satisfying customer demands more efficiently. When you think of the world’s most efficient and successful performance and supply chains, what comes to mind? For me it is not Wal-mart  or Pepsi but Mumbai Dabbawalas – Watch this Video. The Success of Supply Chain of Dabbawalas in Mumbai –Said to be Six Sigma Compliant No over-reliance on technology, all manual operationsCreate an integrated performance chain, the chief, team leaders and delivery men.Acute visibilityKeep it simple. Real simple with a color coding to identify where the food has to be delivered and to whom.Timely Delivery as the shelf life of food is 4-5 hours. Why is it so important for companies to get products to their customers quickly? Faster product availability is significant  to increasing sales and there’s a sizeable profit advantage for the extra time that you are in the market and your competitor is not. The earlier and faster you are in the market, the more orders and market share you enjoy. The ability to deliver a product faster also can make or break a sale. If two competitive products appear to be equal and one is immediately available and the other will be available in a week, which would you choose? Supply Chain Management is all about moving goods more quickly to their destination in a strategic and tactical manner. Supply Chain Management Tomorrow: The future for Supply Chain Management looks very bright. Two major trends are benefiting Supply Chain Management operations- Customer service focus and  Information technology. Successful organisations must excel in both of these areas, the fundamental objective being to “ADD...

Objectives of Forecasting The objective of this post is to impart some light on the uses and importance of forecasting and to get you acquainted with various forecasting techniques. What is Forecasting? Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends. And also to know how these techniques are used in an organization’s decision making process. Nature of Forecast A forecast is an estimate of an event which will happen in future – be it, demand of a product, rainfall at a particular place, population of a country, or growth of a technology.It is estimated based on the past data related to a particular event and hence it is not a deterministic quantity.In any industrial enterprise, forecasting is the first level decision activity before consolidating other decision problems like, materials planning, scheduling, type of production system.Forecasting provides a basis for co-ordination of plans for activities in various units of a company.All the functional managers in any organization will base their decision on the forecast value. So, it provides vital information for that organization. Classification of Forecasts Technology forecastsEconomic forecastsDemand forecasts 1. Technology Forecast Technology is a combination of hardware and software. Hardware is any physical product while software is the know-how, technique or procedure. Technology forecast deals with certain characteristics like level of technical performance, rate of technological advances. It is a prediction of the future characteristics of useful machines, products, process, procedures or techniques. TIFAC – Technology Information Forecasting and Assessment Council is an autonomous organization set up in 1988 under the Department of Science & Technology. In 1993, TIFAC embarked upon the major task of formulating a Technology Vision for the country in various emerging technology areas. 2. Economic Forecast Government agencies and other organizations involve in collecting data and prediction of estimate on the general business environment. Economic forecast This involves the application of statistical models utilizing variables sometimes called indicators. Some of the most well-known economic indicators include inflation and interest rates, GDP growth/decline, retail sales and unemployment rates. This is used to predict future tax revenues, level of business growth, level of employment, level of inflation etc. Also, these will be useful to business circles to plan their future activities based on the level of business growth. 3. Demand Forecast This gives the expected level of demand for goods or services. This is the basic input for business planning and control. Hence, the decisions for all the functions of any corporate house are influenced by demand forecast. Factors Affecting Demand Forecast Business cycleRandom variationCustomer’s planProduct’s life cycleCompetitor’s efforts and pricesCustomer’s confidence and attitudeQualityCredit policyDesign of goods or servicesReputation for serviceSales...

Just in Time Manufacturing Concept JIT Philosophy: With the progression in product-process technologies and the hybrid manufacturing systems, the Japanese have been perfecting a manufacturing system called ‘Just in Time’ or ‘JIT’. This JIT operating system is nothing but a production strategy that strives to improve business return on investment by reducing in-process inventory and associated carrying costs. The JIT purchasing system has emphasis on timing to supply materials just in time for use on the factory floor. Equally important emphasis is given to close and long term relationship with a few suppliers. The suppliers in JIT manufacturing are geographically closely located. Specifications: Producing and delivering finished goods ‘just in time’ to be sold Partly finished goods ‘just in time’ to be assembled into finished goods Parts ‘just in time’ to go into partly finished goods Materials ‘just in time’ to be made into parts. Loose specifications instead of rigid product specifications are used which leads to best use of supplier specialization and expertise for low cost and better quality. Frequent deliveries (daily deliveries) of small lots of exact quantities required are supplied directly to the shop floor avoiding large inventories, paper work and double inspection. The JIT system underlines the mutual confidence between buyer and supplier and long term relationship. This leads to investment by the supplier for the benefit of the buyer in terms of plant and equipment for improvement of quality, reduction of cost and shortening manufacturing lead times. Where does the responsibility lie? ‘The responsibility for the quality rests with the manufacturer of the part’ is the principle behind this Japanese practice. The primary responsibility for quality is transferred from quality control department to the production department. The quality control is considered a line function rather than staff function. The processes are designed to have less specialization on the part of workers. The physical layout is arranged in such a way that workers can operate two or three machines effectively and thereby become multifunctional. Good Quality First Time Every Time: Workers are organized in small closely linked groups thereby building team work. The production for each stage is planned in small lot sizes just meeting the needs of the subsequent stage. The system is such that even if one item produced is substandard, it would affect subsequent processes causing shortages and exposing the process or worker who has produced substandard item. This acts as a great motivator to produce good quality first time, every time. This also heightens the awareness among the workers about the inter dependence of processes. Taiichi Ohno, Father of the Toyota Production System saw this as an attribute rather than a problem. He used an analogy of lowering the water level in a river to expose the rocks to explain how reducing inventory showed where production flow was disrupted. Once bottle necks were exposed, they could be rectified or removed. Since one of the main barriers was rework, lowering inventory shoved each shop to improve its own quality. Just-in-time is a means to improving performance of the system, not an end. The result of the Japanese manufacturing system is quite pervasive in the areas of: Reduction in inventory Reduction in scrap Reduction in work Reduction in indirect costs Reduction in spare Reduction in administrative costs Increase in motivation of workers Increase in quality Better response to customers Better system flexibility and quicker response. What is kanban? Kanban is Japanese for “visual signal” or “card.” Toyota line-workers used a Kanban (i.e., an actual card) to signal steps in their manufacturing process. The system’s highly visual nature allowed teams to communicate more easily on what work needed to be done and when. It...

Project Formulation and Project Life Cycle What is a Project? “A temporary endevour leading to a product / service or result ”  A project is any series of activities and tasks that: • Have a specific objective to be completed within certain specifications • Have defined start and end dates; • Have funding limits (if applicable); and • Consume resources (i.e. money, time, equipment).   Characteristic Features of a Project: • Has a mission or a set of objectives. Once the mission is achieved the project is treated as completed. • Has to terminate at some time or the other (temporary in nature)  • The project is one single entity and its responsibility is assigned to one single agency. • Calls for team-work, the members of the team may come from different organizational units, different disciplines, and   geographic regions. • Has a life cycle represented by growth, maturity and decay. • Is unique and no two projects are similar, even though the plants set up are identical. The organizations, the infrastructure, the location and the people make the project unique. • Change is a natural phenomenon with every project throughout its life span. Some changes may not have any major impact, but some  may change the very nature of the project. • The happenings during the life cycle of a project are not fully known at any stage. As time passes, the details are finalized successively. • Is always customer-specific. The requirements and constraints within which a project must be executed are stipulated by the customer. • Is a complex set of things. Projects vary in terms of technology, equipment and materials, machinery and people, work ethics and organizational culture. • A substantial portion of the work in a project is done by sub-contracting. The greater the complexity of a project, the greater will be the extent of work performed by subcontractors. • Is exposed to risk and uncertainty and the extent of these depend upon how the project moves through the various stages in its life span. • A well defined project has lesser risk and uncertainty, whereas an ill-defined project faces greater degree of risk and uncertainty. Project Life Cycle: The Project Life Cycle refers to a series of activities which are necessary to fulfill project goals or objectives. The different phases are as follows:   a) Concept or initialization phase In this phase, the project idea emerges and the #management decides on the need for a project. A project which is well conceived can be later implemented successfully. b) Project Definition Phase •The techno-economic viability of the project is checked •The technical configuration of the project is identified •The performance requirements, sub-systems, key equipments etc.- purchased •The cost estimates with limits are identified •Schedule of implementation is identified c) Growth or Organisation Phase Organizations, during this phase, undertake the following actions: a)    Establishing the infrastructure and enabling services for the project b)    Project engineering and design c)    Setting up Project Organization and staffing d)    Appointing a project manager e)    Preparing schedules and budgets f)    Obtaining necessary licenses and clearances from the Government g)    Raising finance h)   Developing systems and procedures for monitoring and reviewing project progress i)    Procedures for inviting tenders and awarding contracts j)    Site preparation and development k)   Procuring equipment and materials l)    Work packaging This phase covers both paper work connected with project planning and also implementation activities.  Planning is necessary to avoid crisis management; it makes the implementation phase to run smoothly. d) Implementation Phase The activities include: 1)  The preparation of specifications for major equipment and machineries, 2)  Placing orders with vendors for the supply of...