Materials and Resource Requirement Planning

Introduction

Success of an operation department of any organization is dependent upon an efficient

production plan. One of the key essential of a production plan is material and manufacturing
planning system. Material requirement planning plays a pivotal role in assembly-line production.
Material requirement planning is a system based approach, which organizes all required
production material.

Material requirement planning is an information system for production planning based on

inventory management. The basic components of material planning are:

Material planning provides information that all the required raw material and products are
available for production.

Material planning ensures that inventory level are maintained at its minimum levels. But also
ensures that material and product are available whenever production is scheduled, therefore,
helping in matching demand and supply.

Material planning provides information of production planning and scheduling but also provides
information around dispatch and stocking.

Objective of Material Requirement Planning

Material requirement planning is processed which production planning and inventory control
system, and its three objectives are as follows:

Primary objective is to ensure that material and components are available for production, and
final products are ready for dispatch.

Another primary objective is not only to maintain minimum inventory but also ensure right
quantity of material is available at the right time to produce right quantity of final products.
Another primary objective is to ensure planning of all manufacturing processes, this scheduling
of different job works as to minimize or remove any kind of idle time for machine and workers.

Advantages and Disadvantages of Material Resource Planning

As with every system based process, material resource planning also has its advantages and
disadvantages, and they are as follows:

Advantages of Material Resource Planning

It helps in maintain minimum inventory levels.

With minimum inventory levels, material planning also reduces associated costs.

Material tracking becomes easy and ensures that economic order quantity is achieved for all lot
orders.

Material planning smoothens capacity utilization and allocates correct time to products as per
demand forecast.

Disadvantages of Material Resource Planning

Material planning is highly dependent on inputs it receives from other systems or department. If
input information is not correct than output for material planning will also be incorrect.

Material planning requires maintenance of robust database with all information pertaining
inventory records, production schedule, etc. without which output again would be incorrect.

Material planning system requires proper training for end users, as to get maximum out of the
system.

Material resource planning system requires substantial investment of time and capital.

Material Resource Planning - Inter dependency of Business Function

Productivity and Its Role in Shaping Economies and Businesses

What is Aggregate Planning? - Importance and its Strategies

Introduction

An organization can finalize its business plans on the recommendation of demand forecast. Once
business plans are ready, an organization can do backward working from the final sales unit to
raw materials required. Thus annual and quarterly plans are broken down into labor, raw
material, working capital, etc. requirements over a medium-range period (6 months to 18
months). This process of working out production requirements for a medium range is called
aggregate planning.

Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to balance

long-term strategic planning with short term production success. Following factors are critical
before an aggregate planning process can actually start;

A complete information is required about available production facility and raw materials.

A solid demand forecast covering the medium-range period

Financial planning surrounding the production cost which includes raw material, labor, inventory
planning, etc.

Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, following inputs are required;

An aggregate demand forecast for the relevant period

Evaluation of all the available means to manage capacity planning like sub-contracting,
outsourcing, etc.

Existing operational status of workforce (number, skill set, etc.), inventory level and production
efficiency

Aggregate planning will ensure that organization can plan for workforce level, inventory level
and production rate in line with its strategic goal and objective.

Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal, financial goal and overall
strategic objective of the organization. It serves as a platform to manage capacity and demand
planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both
by pricing, promotion, order management and new demand creation.

In scenario where capacity is not matching demand, an organization can try to balance the both
by various alternatives such as.

Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until

demand decrease/increase.

Including overtime as part of scheduling there by creating additional capacity.

Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives of the

organization. Aggregate planning helps in:

Achieving financial goals by reducing overall variable cost and improving the bottom line

Maximum utilization of the available production facility

Provide customer delight by matching demand and reducing wait time for customers

Reduce investment in inventory stocking

Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for organization to choose from.
They are as follows.

Level Strategy
As the name suggests, level strategy looks to maintain a steady production rate and workforce
level. In this strategy, organization requires a robust forecast demand as to increase or decrease
production in anticipation of lower or higher customer demand. Advantage of level strategy is
steady workforce. Disadvantage of level strategy is high inventory and increase back logs.

Chase Strategy

As the name suggests, chase strategy looks to dynamically match demand with production.
Advantage of chase strategy is lower inventory levels and back logs. Disadvantage is lower
productivity, quality and depressed work force.

Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy.

Capacity Planning

The production system design planning considers input requirements, conversion process and
output. After considering the forecast and long-term planning organization should undertake
capacity planning.

Capacity is defined as the ability to achieve, store or produce. For an organization, capacity
would be the ability of a given system to produce output within the specific time period. In
operations, management capacity is referred as an amount of the input resources available to
produce relative output over period of time.

In general, terms capacity is referred as maximum production capacity, which can be attained
within a normal working schedule.

Capacity planning is essential to be determining optimum utilization of resource and plays an

important role decision-making process, for example, extension of existing operations,
modification to product lines, starting new products, etc.

Strategic Capacity Planning

A technique used to identify and measure overall capacity of production is referred to as strategic
capacity planning. Strategic capacity planning is utilized for capital intensive resource like plant,
machinery, labor, etc.

Strategic capacity planning is essential as it helps the organization in meeting the future
requirements of the organization. Planning ensures that operating cost are maintained at a
minimum possible level without affecting the quality. It ensures the organization remain
competitive and can achieve the long-term growth plan.

Capacity Planning Classification

Capacity planning based on the timeline is classified into three main categories long range,
medium range and short range.

Long Term Capacity: Long range capacity of an organization is dependent on various other
capacities like design capacity, production capacity, sustainable capacity and effective capacity.
Design capacity is the maximum output possible as indicated by equipment manufacturer under
ideal working condition.

Production capacity is the maximum output possible from equipment under normal working
condition or day.

Sustainable capacity is the maximum production level achievable in realistic work condition and
considering normal machine breakdown, maintenance, etc.

Effective capacity is the optimum production level under pre-defined job and work-schedules,
normal machine breakdown, maintenance, etc.

Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3
years of a time frame is referred to as medium term capacity planning.

Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or
quarterly time frame is referred to as short term capacity planning.

Facility Location - Factors Influencing the Location

Facility Location is the right location for the manufacturing facility, it will have sufficient access
to the customers, workers, transportation, etc. For commercial success, and competitive
advantage following are the critical factors:

Overall objective of an organization is to satisfy and delight customers with its product and
services. Therefore, for an organization it becomes important to have strategy formulated around
its manufacturing unit. A manufacturing unit is the place where all inputs such as raw material,
equipment, skilled labors, etc. come together and manufacture products for customers. One of
the most critical factors determining the success of the manufacturing unit is the location.

Location Strategy

The goal of an organization is customer delight for that it needs access to the customers at
minimum possible cost. This is achieved by developing location strategy. Location strategy helps
the company in determining product offering, market, demand forecast in different markets, best
location to access customers and best manufacturing and service location.

Factors Influencing Facility Location

If the organization can configure the right location for the manufacturing facility, it will have
sufficient access to the customers, workers, transportation, etc. For commercial success, and
competitive advantage following are the critical factors:

Customer Proximity: Facility locations are selected closer to the customer as to reduce
transportation cost and decrease time in reaching the customer.

Business Area: Presence of other similar manufacturing units around makes business area
conducive for facility establishment.

Availability of Skill Labor: Education, experience and skill of available labor are another
important, which determines facility location.

Free Trade Zone/Agreement: Free-trade zones promote the establishment of manufacturing

facility by providing incentives in custom duties and levies. On another hand free trade
agreement is among countries providing an incentive to establish business, in particular, country.
Suppliers: Continuous and quality supply of the raw materials is another critical factor in
determining the location of manufacturing facility.

Environmental Policy: In current globalized world pollution, control is very important, therefore
understanding of environmental policy for the facility location is another critical factor.

Facility Layout

Introduction

For an organization to have an effective and efficient manufacturing unit, it is important that
special attention is given to facility layout.

Facility layout is an arrangement of different aspects of manufacturing in an appropriate manner

as to achieve desired production results. Facility layout considers available space, final product,
safety of users and facility and convenience of operations.

An effective facility layout ensures that there is a smooth and steady flow of production material,
equipment and manpower at minimum cost.

Facility layout looks at physical allocation of space for economic activity in the plant. Therefore,
main objective of the facility layout planning is to design effective workflow as to make
equipment and workers more productive.

Facility Layout Objective

A model facility layout should be able to provide an ideal relationship between raw material,
equipment, manpower and final product at minimal cost under safe and comfortable
environment. An efficient and effective facility layout can cover following objectives:

To provide optimum space to organize equipment and facilitate movement of goods and to create
safe and comfortable work environment.

To promote order in production towards a single objective

To reduce movement of workers, raw material and equipment

To promote safety of plant as well as its workers

To facilitate extension or change in the layout to accommodate new product line or technology
up gradation

To increase production capacity of the organization

An organization can achieve the above-mentioned objective by ensuring the following:

Better training of the workers and supervisors.

Creating awareness about of health hazard and safety standards

Optimum utilization of workforce and equipment

Encouraging empowerment and reducing administrative and other indirect work

Factors affecting Facility Layout

Facility layout designing and implementation is influenced by various factors. These factors vary
from industry to industry but influence facility layout. These factors are as follows:

The design of the facility layout should consider overall objectives set by the organization.

Optimum space needs to be allocated for process and technology.

A proper safety measure as to avoid mishaps.

Overall management policies and future direction of the organization

Types of Facility Layout

There are six types of facility layout, and they are as follows:

Product Layout

Process Layout

Fixed Position Layout

Cellular Technology Layout

Combined Layout, and

Computerized Relative Allocation of Facility Technique

Project Evaluation and Review Technique (PERT) :

PERT is appropriate technique which is used for the projects where the time required or needed
to complete different activities are not known. PERT is majorly applied for scheduling,
organization and integration of different tasks within a project. It provides the blueprint of
project and is efficient technique for project evaluation .

2. Critical Path Method (CPM) :

CPM is a technique which is used for the projects where the time needed for completion of
project is already known. It is majorly used for determining the approximate time within which a
project can be completed. Critical path is the largest path in project management which always
provide minimum time taken for completion of project

Difference between PERT and CPM:

PERT CPM

1. PERT is that technique of project management which is used to manage uncertain (i.e.,
time is not known) activities of any project. CPM is that technique of project management
which is used to manage only certain (i.e., time is known) activities of any project.

2. It is event oriented technique which means that network is constructed on the basis of
event. It is activity oriented technique which means that network is constructed on the basis of
activities.

3. It is a probability model. It is a deterministic model.

4. It majorly focuses on time as meeting time target or estimation of percent completion is
more important. It majorly focuses on Time-cost trade off as minimizing cost is more
important.

5. It is appropriate for high precision time estimation. It is appropriate for reasonable time
estimation.

6. It has Non-repetitive nature of job. It has repetitive nature of job.

7. There is no chance of crashing as there is no certainty of time. There may be

crashing because of certain time boundation.

8. It doesn’t use any dummy activities. It uses dummy activities for representing sequence
of activities.

9. It is suitable for projects which required research and development.It is suitable for
construction projects.

Advantages and Disadvantages of PERT and CPM

Definition of PERT

The project network analysis technique, termed the Program (Project) Evaluation & Review
Technique (PERT), is used to plan and manage projects. The PERT approach concentrates on
how much time and money each activity requires. This will consequently affect how long it takes
and how much it costs to complete the full job. This network analysis method aids in
comprehending how the job performs during the duration of the project. It was created in the
latter half of the 1950s. The project's duration and cost are intended to be decreased.

Advantages and Disadvantages of PERT and CPM

Time is a variable in PERT that indicates the application of planned resources and performance
specifications. The project is first segmented into events and activities using this technique. A
network is then built after determining the correct sequence. After calculating the amount of time
required for each action, the critical path-the longest route connecting all the events-is identified.
PERT is a complex method used in large-scale project planning, scheduling, and control that
entails a number of tasks that are independent of one another and have ambiguous completion
dates. Research and development organizations frequently employ it.

Advantages of PERT analysis

The following is a list of PERT's benefits:

1. PERT helps in planning for big projects

The project manager may easily schedule project activities with the aid of the PERT system. This
method is used more frequently in complex, large-scale project work.

2. Critical path visibility in PERT

The critical path will be clearly displayed using the PERT approach. The crucial path is the path
that contains tasks that cannot, under any circumstances, be put off. The project manager will be
able to make quick, effective decisions that will improve the performance of the project with the
aid of proper knowledge of the stack values and minimal dependency circumstances.

3. Analysis of activity in PERT

The PERT networks' activity and events are examined. Both of these are examined separately
and jointly. This will paint a picture of the project's likely completion and the budget.

4. Coordination of PERT

The several construction organisation departments will supply the data for the PERT operations.
The departments are well integrated, which will aid in enhancing the project team's capacity for
planning and decision-making. The management of the project's activities will be improved by
combining quantitative and qualitative values from a lot of data. Additionally, this will enhance
communication within the organization's various departments.

5. The what-if analysis

By appropriately assessing the critical path, it is possible to learn about the potential outcomes
and the various levels of uncertainty from the project activities. What-if analysis is the term for
this kind of analysis. Permutation and combination operations are carried out for these different
sets. The most advantageous mix of them is taken into account. The set that is selected will have
the lowest cost, most economical operation, and best outcome. The risk connected to any activity
can be determined with the use of this analysis.

Disadvantages of PERT analysis

The following list of PERT's drawbacks includes:

1. Time-oriented method

PERT is a time-focused methodology, so completing tasks or projects by the deadline is crucial.

If it doesn't, an issue might develop.

2. Subjective analysis

In this case, the project tasks are identified in accordance with the information at hand. It is
challenging in PERT projects since it applies to the lone new project area that is not recurring in
nature, making the information collection subjective in nature.

3. Inaccuracy in prediction

Since PERT lacks historical data for a project's framework, prediction is necessary. In the event
that the prediction is incorrect, the project could be ruined.

4. Costly process

In terms of the amount of time, study, forecast, and resources used, it is too expensive.

5. Labour intensive

PERT analysis is labour-intensive in nature. Large and complex networks form as a result of the
possibility of a rise in project activities and the emergence of various task dependencies. This
method won't work well for the project if two tasks share resources.

Definition of CPM
The Critical Path Method, sometimes known as CPM, is a method used for planning and
preparation, organizing, coordination, and control in projects. It was created in the late 1950s. It
is expected that the activity's length is set and predictable in this case. The earliest & latest start
times for each activity are determined using CPM.

To shorten the process and prevent queue formation, the procedure separates critical and non-
critical activities. The identification of important tasks is necessary because if one action is
delayed, the entire process will suffer. The Critical Path Method is so named for this reason.

Advantages of CPM

1. Better communication

Critical route method schedules call for feedback from important parties at every stage of the
project's lifespan. The timeline becomes more realistic and solid from the outset when the skills
of diverse team members & subcontractors, such as architects, electricians, and construction
managers, are combined.

2. Ease in prioritization

Prioritization is made simpler since project managers may more easily define priorities and
calculate the float of each work by identifying the critical path. Slack or float measures how
much time a task may be put off before it affects when it will be finished. The float of non-
critical activities is positive, whereas the float of critical path tasks is zero. Teams can determine
the priority of each work by calculating its float. The priority increases as the float decreases.

3. Improved scheduling accuracy

The critical path approach is a well-liked and dependable tool for enhancing project schedule
accuracy. The PERT analysis helps teams in estimating overall project time and is often used
alongside CPM. PERT considers unpredictable events, while CPM concentrates on predictable
activities, resulting in three potential timelines: the most optimistic, the most pessimistic, and the
most realistic. Project managers can produce the most precise forecasts by combining PERT and
CPM.

4. Better risk detection

Due to critical route schedules clearly showing the dependencies between jobs, project managers
are better able to anticipate the ripple effects of a delay. Compared to alternative systems that do
not manage dependencies, CPM offers earlier opportunities for corrections and prevents more
surprises.

5. Greater flexibility

Project managers have the capabilities to quickly adjust the timetable when things don't go as
planned, thanks to CPM network diagrams. To compare results and choose the best alternative,
project managers might use software that can even simulate the consequences of various
adjustments.

6. More visual impact

Project managers may quickly comprehend the timing and status of a project by using Gantt
charts and CPM network diagrams to illustrate critical path schedules. Team members and
project managers can have a more intuitive sense of a project's trajectory using these visual tools
than they might be able to use a less visually stimulating option.

Disadvantages of CPM

1. Increased complexity

CPM drawbacks include increased complexity and using a method with numerous moving
elements called the critical path. Although the computations can be automated using software,
accurate data entry involves extensive investigation and still carries the danger of human error.

2. Reduced applicability

Not all projects can benefit from the critical route approach. For instance, CPM demands
repeatable and predictable timelines. For creative projects that frequently come together in
unforeseen ways, such as product designing or research work, CPM is not a suitable fit. On the
other hand, repetitive or autonomous tasks are not ideal candidates for CPM. For instance,
dozens of machines may need to be cleaned as part of a weekly maintenance schedule, but the
sequence in which they are serviced is irrelevant. Since there are no activity constraints and no
critical route in this situation, CPM is not useful.

3. Limited attention to high-float activities

When using the CPM, project managers concentrate on the tasks that are on the critical path.
Even though the critical route does affect the overall project duration, employing this strategy
can make it simpler to disregard low-priority or floaty activities, which can cause delays. A new
building's electrical system installation, for instance, is not a critical path task because it may be
completed over a long period of time. However, project managers can still affect the completion
schedule if they overlook wiring work or put it off for too long.

Inventory Definition

Stock or inventory refers to the products and resources that a company is able to store for the
purpose of resales, production, or use. The management of inventory focuses on defining the
form and arrangement of the stocked items.

Classification of Inventories:

Inventories are classified as follows:

Direct inventories

Indirect inventories

1. Direct Inventories:

These inventories play an integral part in the production of a product and eventually are a vital
component of the final product.

Direct inventories are of different kinds:

(a) Raw Materials:

These are the primary materials that are used to make components, parts, and even products
made by companies.

(b) In-Process Inventories (Work in Progress):

They are semi-finished items at different stages of manufacturing. Raw materials become work-
in-progress at the end of the first process and stay that way until they become piece parts or
finished goods.

(c) Purchased Parts:

These are the components, sub-assemblies, completed parts, and so on, bought from outside
suppliers.

(d) Finished Goods:

These are the products of the process of production and are the final (final) items ready for
delivery to customers.

2. Indirect Inventories:

They are the materials that aid in the transformation of raw materials into the final product but
don't become an integral part of the end product.

Indirect inventories are further categorized as:

(a) Tools:

These could be (i) common tools such as drills, lathes, taps, milling cutters, etc., or (ii) hand
tools, such as chisels, files, pliers, spanners, hand saws, and so on.

(b) Supplies:

These are the components that are used in the running of equipment, machines, or plants.
However, they do not go into the finished product.

These could be:

(i) Consumables, such as Broom, cotton waste, etc.

(ii) Materials used for welding

(iii) Materials that are abrasive like emery cloth, sandpaper, etc.,

(iv) Brushes

(v) Supplies for general office use

(vi) Oils, greases, and other fluids.

(vii) Printing forms and other forms

What Is Inventory Management?

The management of inventory helps businesses determine the quantity and type of inventory to
order at a given point. It monitors inventory from purchase until the time of sale of goods. The
process identifies and responds to changes in the market to ensure that there is plenty of stock to
satisfy the demands of customers and to provide proper warning of an inventory shortage.

Inventory Definition

Once it is sold, inventory transforms into revenue. Before it is sold, inventory (although
classified as an asset in the balance sheet) ties up cash. So, too much inventory is costly and can
affect the flow of cash.

One measure of good inventory management is the turnover of inventory. A measurement in

accounting that measures inventory turnover is the frequency at which the stock is sold over the
course of time. A company doesn't need more inventory than sales. A low turnover of inventory
can cause dead stock or stocks that are not sold.

What is Inventory Control?

It can be described "as the systematic location storage and recording of goods in such a way that
desired degree of service can be made to the operating shops at minimum ultimate cost."

The Need for Inventory Control

The purpose of inventory control is to keep an inventory (store) of items that will allow
manufacturing according to the plan of production in accordance with sales requirements and at
the least possible final cost.

Incorrect inventory control can cause losses. These are a result of purchases that exceed what is
required, as well as the costs of production slowing down from the material not being in stock at
the time needed. Every time a machine is shut down because of a shortage of materials, or every
time a sale is postponed or canceled due to a lack of goods that are finished. This means that a
business is unable to make money.

In order to ensure a smooth operation of the factory and to avoid the accumulation of inventory
or idle machine time, the right amount of material should be available at the time it is required.
An effective inventory control system can limit these losses to a significant extent.

Functions of Inventory Control

The following are the most significant functions of Inventory Control:

(a) To Run the Stores Effectively: It includes the layout of storage media (bins or shelves), open
spaces, the use of storage space, receiving and issuing procedures, and more.

(b) To ensure the timely availability of materials and prevent the accumulation of stock levels.

(c) Technical Responsibility for the State of Materials: This covers methods of storage and
analyzing maintenance procedures and research studies on deterioration and obsolescence.

(d) Stock Control System: Physical verification (stock-taking) records, purchasing policies, and
procedures for purchasing products.

(e) Maintaining the specified raw materials, general supplies, work-in-process, and components
in sufficient quantity to satisfy the demands of production.

(f) Protection of the Inventory from loss due to incorrect handling and storage of products and
their unauthorized removal from the stores.

(g) Costing all the materials that are supplied to shops to determine the cost of materials.
Essential Steps in Inventory Control

It is vital that all the materials needed to be available when needed and equally vital that hat no
more stores shall be carried as is necessary. The maximum and minimum amounts of each store
should, accordingly, be determined with great attention. Most of the time, the limits are
determined only through knowledge and observation. It has been observed that this leads to an
enormous reduction in stock.

Elective Techniques of Inventory Control

(1) A-B-C Control Policy

It's difficult and expensive to devote an equal amount of attention to every item in the inventory.
The A-B-C method is designed to provide an inventory control that is relative. In this way, the
greatest attention is given to items that use the most money, and also, a reasonable amount of
attention could be paid to items of medium value, and the focus on items of lower value items
can become a routine process only. This strategy can also be utilized in different aspects of the
management of materials.

If all the items in the company's store are analyzed by the annual consumption of each item in
rupees, it can be seen that close to 10% (sometimes even less) of the items make up about 70%
of total annual consumption costs. , about 20% of the items will require about 25% of the total
cost of consumption, and the remaining 70% of the items will only require 5% of the total annual
consumption cost.

The first category, a small number of items with high consumption costs, is called item A; the
second category is an item with average consumption value called B-items, while the third
category, i.e., a large number of items with low annual consumption costs, is C-items.

It should be clarified that the A-B-C analysis does not depend on the unit price of the commodity
but on its annual consumption. Furthermore, it is also made clear that it does not indicate the
importance of any item or category and that each item is of equal importance.
For example, when installing a large rupee slush machine, some foundation bolts (costs can be as
little as Rs.100 or 200) are not available in stores, so this machine will not be able to be erected.
So these bolts are as important as the machine even though one is type A and the other is type C.

A-B-C analysis is a fundamental materials management technique and can be applied to most
aspects of materials management, such as purchasing, sales, inspection, inventory control, and
warehouse keeping. , etc.

Thus, we see that the policy of controlling factors A, B, and C is based on two principles, which
are:

(i) Keep fixed capital and inventory as low as possible,

(ii) Ensure that all documents are available when needed. Control policies based on these two
principles are described below.

Policy for category A:

(i) Since these items represent 70% of the total value, they should therefore be ordered more
often but in small quantities to always reduce the capital tied up.

(ii) The demand for these items must be planned in advance for expected future consumption,
such that only the required quantities arrive just before they are required for consumption.

(iii) The purchase of items in the A category must be reviewed by senior management executives
in the purchasing department.

(iv) Since A items should be stocked as little as possible, maximum efforts should be made to
expedite delivery. Delivery within a specified order period must be adhered to so that the A
items are always being cleared out.

(v) Two or more suppliers for each item can be hired to eliminate dependence on one supplier to
avoid supply failure. This will ensure the timely delivery of products.

(vi) Order quantities, reorder points, and minimum inventory levels should be subjected to
regular review.
Policy for category B:

(i) B Item policies are generally somewhere between those of A items and C items.

(ii) Orders for these items should be placed less frequently than for A items. Normally, 3-6
orders per year are placed for B items.

Policy for C-items:

(i) Since C items are not capital intensive, many of these items can be stocked (i.e., six months to
a year in stock).

(ii) Orders should be placed annually or semi-annually to reduce paperwork and ordering costs
and to qualify for volume discounts on bulk purchases.

The purpose of ABC analysis:

The purpose of ABC analysis is to develop policy guidelines for selective control. ABC analysis
allows materials managers to exercise selective control when faced with a large number of items.
Stricter and more precise procedures are essential for items with an "A" value.

The level of control must be strict for 'A' items and should be as low as possible for 'C' items.
ABC analysis can help determine the number of orders and can lower the cost of inventory
overall. It is also commonplace to further divide 'A' items into A 1 and A 2 or A + and A + as
well as groups for B as well as C' items to ensure greater control.

For items marked 'A', there must be weekly statements of control and rigorous value analysis.
Accurate forecasts for material planning; Central buying and storage; multiple sources; and
should be handled by an officer in charge of the senior level, while for 'C' items, there must be a
follow-up process and speeding up in extreme circumstances; Decentralized purchases and
storage; Minimum Value Analysis; rough estimates for planning, and are able to be delegated
completely.

(2) VED Analysis:

The objects can be classified based on their usage, consumption, or value. A-B-C classification is
the most ancient and widely used method; however, nowadays, VED, along with SDE analysis,
is also utilized. VED analysis is performed to assess the importance of having spares.

V refers to vital elements without which production would stop.

E stands for Essential Items, without which dislocation of production work occurs.

D is for Desirable Items; the items that do not result in a loss of production fall into this category.

So, in this analysis system, the base is the criticality of products, whereas, in the A-B-C analysis,
the basis is consumption figures.

(3) SDE Analysis:

It is calculated based on the availability position of every item. Here,

S means Scarce Items that are not in stock, and therefore, their availability is limited. This
includes imports.

D means the difficult items that are unable to be purchased easily.

E is a reference to easily accessible items.

(4) MNG Analysis:

In this analysis,

M refers to Moving items. These are items that are consumed at different times.

N refers to items that are not moving. These are the items that aren't consumed during the year.

G refers to Ghost items. These are items that had no balance at the start and the close of the
previous fiscal year and had zero transactions (receipts and/or issues) in the course of the year.
These are items that do not exist and for which the storekeeper has bin cards that show a balance
of zero.

These four techniques for controlling are frequently employed. But there are some additional
methods that assist the material management team in controlling the many objects and efficiently
managing the huge quantity of items, and efficiently redirecting his efforts to the troublesome
areas, resulting in the best utilization of his efforts.

What Is Economic Order Quantity?

Economic order quantity (EOQ) is the ideal quantity of units a company should purchase to meet
demand while minimizing inventory costs such as holding costs, shortage costs, and order costs.
This production-scheduling model was developed in 1913 by Ford W. Harris and has been
refined over time. The economic order quantity formula assumes that demand, ordering, and
holding costs all remain constant.

Formula for Calculating Economic Order Quantity (EOQ)

Economic Order Quantity Formula

The calculation of the Economic Order Quantity formula takes place by reducing the total cost
per order. This is done by adjusting the first-order derivative to 0.

The key aspects in the EOQ formula are as follows:

Holding Cost

Annual Quantity Demanded

Ordering Cost

Volume per Order

Unit Cost

Carrying Cost

Aspects in Economic Order Quantity

Now let us discuss the various aspects in Economic Order Quantity one by one briefly.

Annual demand (D):

It refers to the amount of demand an organization gets for its product each year. This can be
determined by looking into the historical order data.

Volume Per Order:

It refers to the amount of volume an organization goes for per order. This can be determined by
analyzing historical inventory or sales data.

Ordering cost (S):

Ordering cost means the cost of an order per purchase. Experts also refer to it as the ‘setup cost’.
This particular cost is inclusive of both the shipping and handling costs.

Unit Cost (Variable Cost):

Unit or Variable costs are those that are subject to change in accordance with the volume change.
It includes:

Credit card fees

Packaging supplies

Delivery costs

Production supplies

Piece-rate labour

Raw materials

Commissions

Holding costs (H):

Holding cost refers to the totality of the cost of holding inventory. Reducing these costs is a key
supply chain management strategy.

Carrying Cost (Interest Rate):

This refers to the costs a business pays for holding inventory in stock in the form of interest rate.
Significance of Economic Order Quantity

The significance of Economic Order Quantity can be understood with the following points:

It helps in the identification of the optimal number of product units to order. With the help of
EOQ, an organization can significantly reduce storing unit costs, delivering costs, and purchase
costs.

One can determine various levels of production by modifying the EOQ formula.

EOQ can help an organization manage its cash flow efficiently. It can efficiently maintain an
appropriate inventory balance.

The inventory reorder point of an organization can be determined by EOQ. This way an
organization prevents a situation where it runs out of inventory. Hence, EOQ prevents loss of
sales and customer satisfaction.

What Is Supply Chain Management (SCM)?

Supply chain management is the management of the flow of goods and services and includes all
processes that transform raw materials into final products. It involves the active streamlining of a
business's supply-side activities to maximize customer value and gain a competitive advantage in
the marketplace.

How Supply Chain Management (SCM) Works

Supply chain management (SCM) represents an effort by suppliers to develop and implement
supply chains that are as efficient and economical as possible. Supply chains cover everything
from production to product development to the information systems needed to direct these
undertakings.

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of
a product. By managing the supply chain, companies can cut excess costs and deliver products to
the consumer faster. This is done by keeping tighter control of internal inventories, internal
production, distribution, sales, and the inventories of company vendors.
SCM is based on the idea that nearly every product that comes to market results from the efforts
of various organizations that make up a supply chain. Although supply chains have existed for
ages, most companies have only recently paid attention to them as a value-add to their
operations.

5 Parts of SCM

The supply chain manager tries to minimize shortages and keep costs down. The job is not only
about logistics and purchasing inventory. According to Salary.com, supply chain managers
“oversee and manage overall supply chain and logistic operations to maximize efficiency and
minimize the cost of organization's supply chain."

Productivity and efficiency improvements can go straight to the bottom line of a company. Good
supply chain management keeps companies out of the headlines and away from expensive recalls
and lawsuits. In SCM, the supply chain manager coordinates the logistics of all aspects of the
supply chain which consists of the following five parts.

Planning

To get the best results from SCM, the process usually begins with planning to match supply with
customer and manufacturing demands. Firms must predict what their future needs will be and act
accordingly. This relates to raw materials needed during each stage of manufacturing, equipment
capacity and limitations, and staffing needs along the SCM process. Large entities often rely on
ERP system modules to aggregate information and compile plans.

Sourcing

Efficient SCM processes rely very heavily on strong relationships with suppliers. Sourcing
entails working with vendors to supply the raw materials needed throughout the manufacturing
process. A company may be able to plan and work with a supplier to source goods in advance.
However, different industries will have different sourcing requirements. In general, SCM
sourcing includes ensuring:

The raw materials meet the manufacturing specification needed for the production of goods.

The prices paid for the goods are in line with market expectations.
The vendor has the flexibility to deliver emergency materials due to unforeseen events.

The vendor has a proven record of delivering goods on time and in good quality.

Supply chain management is especially critical when manufacturers are working with perishable
goods. When sourcing goods, firms should be mindful of lead time and how well a supplier can
comply with those needs.

Manufacturing

At the heart of the supply chain management process, the company transforms raw materials by
using machinery, labor, or other external forces to make something new. This final product is the
ultimate goal of the manufacturing process, though it is not the final stage of supply chain
management.

The manufacturing process may be further divided into sub-tasks such as assembly, testing,
inspection, or packaging. During the manufacturing process, a firm must be mindful of waste or
other controllable factors that may cause deviations from original plans. For example, if a
company is using more raw materials than planned and sourced for due to a lack of employee
training, the firm must rectify the issue or revisit the earlier stages in SCM.

Delivering

Once products are made and sales are finalized, a company must get the products into the hands
of its customers. The distribution process is often seen as a brand image contributor, as up until
this point, the customer has not yet interacted with the product. In strong SCM processes, a
company has robust logistic capabilities and delivery channels to ensure timely, safe, and
inexpensive delivery of products.

This includes having a backup or diversified distribution methods should one method of
transportation temporarily be unusable. For example, how might a company's delivery process be
impacted by record snowfall in distribution center areas?

Returning
The supply chain management process concludes with support for the product and customer
returns. Its bad enough that a customer needs to return a product, and its even worse if its due to
an error on the company's part. This return process is often called reverse logistics, and the
company must ensure it has the capabilities to receive returned products and correctly assign
refunds for returns received. Whether a company is performing a product recall or a customer is
simply not satisfied with the product, the transaction with the customer must be remedied.

Many consider customer returns as an interaction between the customer and the company.
However, a very important part of customer returns is the intercompany communication to
identify defective products, expired products, or non-conforming goods. Without addressing the
underlying cause of a customer return, the supply chain management process will have failed,
and future returns will likely persist.

SCM vs. Supply Chains

A supply chain is the network of individuals, companies, resources, activities, and technologies
used to make and sell a product or service. A supply chain starts with the delivery of raw
materials from a supplier to a manufacturer and ends with the delivery of the finished product or
service to the end consumer.

SCM oversees each touch point of a company's product or service, from initial creation to the
final sale. With so many places along the supply chain that can add value through efficiencies or
lose value through increased expenses, proper SCM can increase revenues, decrease costs, and
impact a company's bottom line.

Why Is Supply Chain Management Important?

Supply chain management is important because it can help achieve several business objectives.
For instance, controlling manufacturing processes can improve product quality, reducing the risk
of recalls and lawsuits while helping to build a strong consumer brand. At the same time,
controls over shipping procedures can improve customer service by avoiding costly shortages or
periods of inventory oversupply. Overall, supply chain management provides several
opportunities for companies to improve their profit margins and is especially important for
companies with large and international operations.