INVENTORY CONTROL

1. Introduction

Inventory is defined as the list of movable goods which are necessary to

manufacture a product and to maintain the equipments and machinery in good
working order/condition.

Classification

Broadly Classified into

 Direct inventory
 Indirect inventory
i. Direct inventory
It plays direct role in the manufacture of product such as:
 Raw materials
 Inprocess inventories (= work in progress)
 Purchased parts (purchasing of some components instead of
manf. in the plant)
 Inished goods.
ii. Indirect inventory
it helps the raw materials to get converted into finished part. such as:
 Tools
 Supplies
- miscellaneous consumable – brooms, cotton, wool, jute,
etc.
- welding electrode, solders etc.
- abrasive mat – emery cloth, sand paper etc.
- brushes, maps, etc.
- oil greases etc.
- general office supplies – candles, sealing wax etc.
- printed forms such as – envelope, letter heads, quotation
forms etc.
Inventory control

Inventory control means – making the desired items of required quality

and quantity available to various departments/section as & when they need.

(c) Relevant costs

The relevant costs for how much & when decisions of normal inventory
keeping one:

1. Cost of capital
Since inventory is equivalent to locked-up working capital the cost of
capital is an important relevant cost. this is the opportunity cost of
investing in inventory.
2. Space cost
Inventory keeping needs space and therefore, how much and when
question of inventory keeping are related to space requirements. this
cost may be the rent paid for the space.
3. Materials handling cost
The material need to be moved within the warehose and the factory and
the cost associated with the internal movement of materials (or
inventory) is called materials handling cost.
4. Obsolescence, spoilage or Deterioration cost
If the inventory is procured in a large quantity, there is always a risk of
the item becoming absolute due to a change in product design or the
item getting spoiled because of natural ageing process. Such cost has a
relation to basic question of how much and when?
5. Insurance costs
There is always a risk of fire or theft of materials. a firm might have
taken insurance against such mishaps and the insurance premium paid
are the relevant cost.
6. Cost of general administration
Inventory keeping will involve the use of various staffs. with large
inventories, the cost of general administration might go up.
7. Inventory procurement cost
 Cost associated with the procurement activities such as tendering,
evaluation of bids, ordering, follow-up the purchase order, receipt and
inspection of materials etc. is called inventory procurement cost.

(c) Basic EOQ model

EOQ = Economic Order Quantity.

EOQ represent the size of the order (or lot size) such that the sum of
carrying cost (due to holding the inventory) and ordering cost is minimum. it is
shown by point A of figure 2.1.

As mentioned earlier, the two most important decisions related to

inventory control are:

 When to place an order? &

 How much to order?

In 1913, F.W. Harris developed a rule for determining optimum

number of units of an item to purchase based on some fundamental
assumptions. This model is called Basic Economic Order Quantity model. it has
broad applicability.

Assumptions

The following assumptions are considered for the sake of simplicity of model.

1) Demand (D) is assumed to be uniform.

2) The purchase price per unit (P) is independent of quantity ordered.
3) The ordering cost per order (Co) is fixed irrespective of size f lot.
4) The carrying cost/holding cost (Cc) is proportional to the quantity stored.
5) Shortage are not permitted i.e., as soon as the level of inventory reaches
zero, the inventory is replenished.
6) The lead time (LT) for deliveries (i.e. the time of ordering till the material
is delivered) is constant and is known with certainty.

The assumptions 5 and 6 are shown graphically in fig 2.2.

Let Q = order size

D
Therefore, the number orders/year = Q ---------(1)
 Q
Average inventory level = 2
D
Ordering cost per year = × Co-------------(2)
Q

Q
Carrying cost per year = × Cc --------------(3)
2

Purchase cost/year = D × P ----------------(4)

D Q
Now, the total inventory cost per year = TC = × Co + . Cc + D × P-----(5)
Q 2

Differentiating Eq (5) w.r.t. Q it becomes:

d(TC) –D Cc
= Co + --------------(6)
dQ Q2 2
+2D
The 2nd derivative = Co----(7)
3
Q

Since the 2nd derivative is +ve, we can equate the value of first derivative to
zero to get the optimum value of Q.
–D
i.e ., Co + Co
Q
2
2 =0
Cc D

:- 2 = Q 2 Co

2CoD
:- Q2 = Cc

2CoD
:- Q = J -------(8)
Cc

2CoD
So, optimum Q = EOQ = J
Cc

Ex: ABC company estimates that it will sell 12000 units of its product for the
forthcoming year. the ordering cost is Rs 100/- per order and the carrying cost
per year is 20% of the purchase price per unit. The purchase price per unit is Rs
50/-.

Find
 i. Economic Order Quantity
ii. No. of orders/year
iii. Time between successive order.

Solution:

Given D = 12000 units/yr, Co = Rs 100/year

Cc = Rs 50× 0.2 = Rs 10/- per unit/year

2CoD
Therefore (i) EOQ = J 2×100×12000
= 490 units approx.
Cc =J 10

D 12000
No. of orders/year = Q∗ = = 24.49
490
Q∗ 490

Time between successive order = D = 12000

= 0.04 year = 0.48 montℎ

© Models with Quantity Discount

When items are purchased in bulk, buyers are usually given discount in the
purchase price of goods. this discount may be a step function of purchase
quantity as stated in the Following.

Quantity Purchase price

0 ≤ Q1 < b1 → P1

b 1 ≤ Q2 < b2 → P2

: :

: :

bn-1 ≤ Qn → Pn

The procedure to compute the optimal order size for this situation is
given in the following steps.

Step- 1
Find EOQ for nth (last) price break

Q*n = J2CoD
iPn

Where i = fraction of purchase price for inventory carrying.

If it is greater than or equal so bn-1, then the optimal order size Q =

Qn; otherwise go to step-2.

Step- 2

Find EOQ for (n-1)th price break

Q*n-1 = J 2 CoD
i Pn–1

If it is greater than or equal to bn-2, then compute the following and select
the least cost purchase quantity as optimal order size; otherwise go to step-3

i) TC (Qn-1)
ii) TC (bn-1)

Step-3

Find EOQ for (n-2)th price break

Q*n-2 = J 2 CoD
I Pn–2

If it d greater than or equal to bn-3, then compute the following and select
the least cost purchase quantity; otherwise go to step-4.

i) Total cost, TC (Q*n-2)

ii) Total cost, TC (bn-2)
iii) Total cost, TC (bn-1)

Step-4

Continue in this manner until Q*n-k ≥ bn-k-I. Then compare total cost
n(Q*n-k), n(b n-k), n(bn-k+1)………….. n(bn-1) corresponding to purchase quantities
Q*n-k, bn-k, bn-k+1, ……….bn-1 respectively. Finally select the purchase quantity
w.r.t. minimum total cost.

Ex: Annual demand for an item is 4800 units. ordering cost is Rs 500/- per
order. inventory carrying cost is 24% of the purchase price per unit. the price
break are given below.

Quantity Price

0 < Q1 < 1200(b1) → 10

1200 ≤ Q2 < 2000(b2)→ 9

2000 ≤ Q3 (b3) → 8

(a) Find optimal order size.

Solution (a) D = 4800, Co = 500, I = 0.24

Step- 1 P = Rs 8/- Q = J2 CoD

=J
2×500×4800 = 1581
3 3
i P3 0.24×8

Since Q3 < b2, i.e., 2000, go to step-2

Step- 2 P = Rs 9/- Q = J2 CoD

=J
2×500×4800 = 1491
2 2
i P2 0.24×9

Since Q2 > b1 i.e., 1200, find the following costs & select the order size
based on least cost.
0.24×9×1491
TC(Q2) = 9 × 4800 + 500 × 4800
1491+ 2
= Rs 46420 (approx)
0.24 ×8×2000
TC (b2) = 8 × 4800 + 500 × 4800
2000+ 2
= Rs 41,520 (approx)
The least cost is Rs 41,520, Hence optimal order size is 2000.

©Economic Batch Quantity

(a) Without shortage.

It is a manufacturing model
 (b) With shortage.

(a) Manufacturing model without shortage

if a company manufacture its component which is required for its main

product, then the corresponding model of inventory is called  manufacturing
model. This model will be without/with shortage. The rate of consumption of
item is uniform throughout the year. The cost of production per unit is same
irrespective of production 10+ size. Let,

r = annual demand of an item

k = production rate of item (No. of units produced per year)

Co = cost per set-up.

Cc = carrying cost per unit per period.

P = cost of production per unit

EOQ = Economic Batch Quantity

The variation of inventory with time without shortage is shown below.

During the period t1, the item is produced at the rate of k units per
period and simultaneously it is consumed at the rate of r units per period. So
during this period, the inventory is built at the rate of (k-r) units per period.

During the period t2, the production of items is discontinued but the
consumption of item is continued. Hence the inventory is decreased at the of r
units per period during this period.
The various formulae for this situation
2 Cor
 Economic Batch Quantity (EBQ) = J
Cc (1–r/k)

t1* = Q*/K

t2* = Q∗[1–r/k]
r

Cycle time = t1* + t2* (Refer Operation Research Book by Kanti Swarup
for detail)

Ex: If a product is to be manufactured within the company, the details are as

follows:

r = 24000 units/year

k = 48000munits/year

Co = Rs 200/- per set-up

Cc = Rs 20/- per unit/year

Find the EBQ & Cycle time

Solution:

EBQ = 2 Co.r
JCc (1–r 2×200×24000 = 980 approx.
= J20(1–24000/48
/k) 000)
Q∗ 980
t*1 = = = 0.02yr = 0.24 montℎ
k 48000
Q∗ r 980 24000
t*2 = (1 − k) = 24000 (1 − ) = 0.02yr = 0.24 montℎ
r 48000

total cycle time = t*1+t*2 = 0.24+0.24 = 0.48 month

(b) Manufacturing model with shortage

In this model, the items are produced and consumed simultaneously for a
portion of cycle time. The rate of consumption of items is uniform through out
the year. The cost of production per unit is the same irrespective of production
lot size. In this model, stock out/shortage is permitted. It is assumed that the
stock out units will be satisfied from the units which will be produced at a later
date with a penalty (like rate reduction). This is called back ordering. The
operation of this model is shown in fig. 2.4. .

The variables which are used in this model are given below.

r = annual demand of an item

k = production rate of the item

Co = cost/setup

Cc = carrying cost/unit/period

Cs = shortage cost/unit/period.

P = cost of production per unit

In the above model

Q = Economic batch quantity

Q1 = Maximum inventory

Q2 = Maximum stock out

By applying mathematics
2 Co kr (Cc+Cs)
Q* = EBQ = J Cc (k–r) ----------(1)
Cs
 2 Cor(k–r) Cs --------------(2)
Q*1 = J Cc k
× Cc+Cs

2 Co Cc r(k–r)
Q*2 = J Cs(Cc+Cs)× k
k–r
Also Q*1 = ( . Q∗) − Q ∗
k 2
Q∗ Q1 ∗ Q
1
∗ Q2 ∗ Q2∗
t* = ;t*1 = ; t*2 = ; t*3 = ; t*4 =
r k–r r r (k–r)

(c) Periodic and Continuous Review system for stochastic system (=

probabilities)

The situation where demand is not known exactly but the probability
distribution of demand is known (from previous data) is called a stochastic
system/problem.

The control variable in such case is assumed to be either

 The scheduling period. or

 The order level. or
 Both.

The optimum order level will thus be derived by minimizing the total
expected cost rather than the actual cost involved.

Stochastic problem with uniform demand

The following assumptions are made for the simplicity of model.

1) Demand is uniform over a period (let r unit/period)

2) Reorder time is fixed and known
3) Production of commodities is instaneous, and
4) Lead time is negligible.
Let (i) the holding cost/carrying cost per unit item = Cc
(ii) the shortage cost/item/time = Cs
(iii) the inventory level at any time t = Q
 The problem is to determine the optimum order level Q (without
shortage) at the beginning of each period, where Q ≥ r or Q < r (with
shortage). In both these cases the inventory system is shown in fig. 2.5 below.

The units that build up an inventory may consist of either discrete (=

periodic) /continuous system.

(A) Periodic system (or Discrete unit)

Let the demand for r unit be estimated at a discontinuous rate with

probability P(r); r = 1,2,3,…………………………n. That is we may expect demand for
1 unit with probability, p(1); 2 units with probability p(2); and so on. Since all
the possibilities are taken care of, we must have
œ

Σ P(r) = 1and P(r) ≥ 0

r=1

Penalty costs are associated with producing Q which is less than the amount
actually demanded (i.e. Q < r). It is denoted by the shortage cost (Cs). This may
be made up of either

i. Loss of good will &

ii. Contract penalty for failure to deliver.

Similarly we assume that the penalty costs are associated with producing Q,
which is lying surplus even after meeting the demand (i.e. Q ≥ r). We denote
this cost by Cc, as unit cost of oversupplying. This may be made up of either

i) Loss, when extra items are to be sold at lesser price. &

ii) Held by the producer incurring cost.
 Clearly these costs entirely depend upon the discrepancy between Q &
demand (r). And then discrepancy is an under/oversupply.
Q
Expected size of over supply = ∑ (Q − r )P(r)---------(1)
r=1

Q
Expected cost of over production = Cc ∑ r=1 P(r)---------(2)

Expected size of undersupply = ∑ œr=Q+1 (r − Q ). P(r-)---(3)

Expected cost of undersupply = Cs ∑ œ (r − Q )P(r)---(4)
r=Q+1

Thus the total expected cost

TEC(Q) = Cc ∑ Q (Q − r). P(r)+ Cs ∑ œ (r − Q ). P(r-)---(5)
r=1 r=Q+1

The problem now is to find Q so as to minimize TEC(Q).

Let on amount Q+1 instead of Q be produced. Then the total expected cost
equation →
TEC(Q)= Cc ∑ Q+1 (Q + 1 − r ). P(r)+ Cs ∑ œ (r − Q − 1 )P(r)-----(6)
r=1 r=Q+2

On simplification (referring O.R. by Kanti Swarup)

Q
TEC(Q+1) = TEC(Q)+(Cc+Cs) ∑ r=1 P(r)− Cs
& TEC(Q+1) = TEC(Q)+(Cc+Cs) P(r ≤ Q)-Cs ----------(7)

Similarly, when an amount Q-1, instead of Q is produced,

TEC(Q-1) = TEC(Q)-(Cc+Cs) P(r ≤ Q-1)+Cs --------------(8)

Suppose that we find Q* having the property that

(i) TEC(Q*) < TEC(Q*+1) &

(ii) TEC Q* < TEC (Q*-1),

Then Q* would clearly represent a local minimum for TEC(Q)

Let us define ΔTEC(Q) = TEC(Q+1) – TEC(Q) as the difference between

the total expected cost for Q and for the next higher value (Q+1). Thus from
Eq(7) & (8), we have

Δ[TEC(Q)] = (Cc+Cs)P(r ≤ Q) - Cs
And Δ[TEC(Q-1)] = (Cc+Cs) P(r ≤ Q-1) – Cs

Therefore, if Q* be the local minima for TEC(Q), then

(i) TEC(Q*) < TEC(Q*+1) :- Δ[TEC(Q*)] > 0

:- (Cc+Cs) P(r ≤ Q) – Cs > 0

Cs
:- P (r ≤ Q) > ---------------(9)
Cc+Cs
And (ii) TEC(Q*) < TEC(Q*-1) :- Δ[TEC(Q*-1)] <0

:- (Cc+Cs) P(r ≤ Q-1)-Cs < 0

Cs
:- P(r ≤ Q-1) < Cc+Cs ----------(10)
From Eq (9) & (10)
Cs
P(r ≤ Q-1) < Cc+Cs < P(r ≤ Q)
Hence if the oversupply cost Cc and the shortage cost Cs are known, the
optimal quantity Q* is determined when the value of cumulative probability
Cs
distribution P (r) just exceeds the ratio Cs+Cs . That is Q* is determined by
comparing a cost ratio with probability figure.

(B) continuous Review System

When certain demand estimated as a continuous random variable, the

cost equation of the inventory involves integrals instead of summation sign.
The discrete point probabilities p(r) are replaced by probability differential f(r)
dr
for small interval, say r ± 2
of continuous demand variable. In this case
œ
∫1 ƒ(r)dr = 1 and f(r) ≥ 0. Proceeding exactly in the manner as (A), Let

Q = quantity produced

Cc = penalty cost per unit cost of oversupply (Q ≥ r), and

Cs = penalty cost per unit cost of under supply (Q < r)

The expected sizes of over and under supply are:

 Q œ
∫r=1 (Q − r )F (r)dr and∫r=Q (r − Q )ƒ(r)dr respectively

The total expected cost (TEC) associated with producing an amount Q when
facing a demand known only as a continuous random variable is given by:
Q œ
TEC(Q) = Cc ∫ ( − r )F (r)dr + Cs ∫Q (r − Q )ƒ(r)dr ------(11)
r=1 Q

We now determine optimum value Q* so as to minimize TEC (Q)

&TEC(Q) & Q( ) () œ( )
Q − r ƒ r dr + Cs ƒ r − Q ƒ(r)dr
}
= {Cc 1ƒ
&Q &Q Q

Q
= Cc [∫1 ƒ(r)dr + (Q − Q ). 1 −(Q − 1 )ƒ(1). 0]+Cs[-
œ dr
∫ (ƒ(r)dr + (r − Q)ƒ(r) /−(Q − Q)ƒ(Q). 1]
Q dQ
Q œ
= Cc ∫ ƒ(r)dr − Cs ∫ ƒ(r)dr
1 Q
Q œ Q
= Cc∫ ƒ(r)dr − Cs[∫ ƒ(r)dr − ∫ ƒ(r)dr]
1 1 1

Q
= (Cc+Cs)∫1 ƒ(r)dr − Cs ∫1œ ƒ
s(irn)cedr = 1
→ 6TEC(Q) = 0 = (Cc + Cs)∫ Q ƒ(r)dr = Cs =∫ Qƒ(r)dr = Cs
6Q 1 1 Cc+Cs
Cs
& P(r ≤ Q) = Cc+Cs --------------(12)
Moreover,
6 2 TEC(Q)
= (Cc + Cs )ƒ(Q) > 0
2
6Q

Thus Q as determined by Eq (12) is an optimal value so as to minimize TEC(Q).

Cs
Hence P(r ≤ Q) = F(Q*) = Cc+Cs --------(13)
Q
Where F(Q) = ∫1 ƒ(r)dr

This indicates that "the best quantity to be produced is that value of Q

Cs
for which the value of cumulative probability distribution of r is equal to Cc+Cs".
 The optimum value of Q for continuous demand variable may be
illustrated graphically as shown below.

Ex: A newspaper boy buys paper for Rs 1.40 and sells them for Rs 2.45. He can't
return unsold newspaper. Daily demand has the following distributions.

Number of 25 26 27 28 29 30 31 32 33 34 35 36
customers
Probability 0.03 0.05 0.05 0.10 0.15 0.15 0.12 0.10 0.10 0.07 0.06 0.02

If each days demand is independent of the previous days, how many papers he
should order each days?

Solution:

Given Cc = Rs1.40, Cs = Rs2.45 – 1.40 = Rs1.05

The point probabilities are:

r 25 26 27 28 29 30 31 32 33 34 35 36
P(r) 0.03 0.05 0.05 0.10 0.15 0.15 0.12 0.10 0.10 0.07 0.06 0.02
∑ P(r) 0.03 0.08 0.13 0.23 0.38 0.53 0.65 0.75 0.85 0.92 0.98 1.0

Cs 1.05 = 0.4285
Now = 1.40+1.05
Cc+Cs

Now 0.38 < 0.4285 < 0.53 ; so the number of newspaper ordered = 30.0

(C) Safety stock, Recorder point and Order Quantity Calculation

 The safety stock may be defined as minimum aditional inventory to
serve as a safety margin (or cushion) to meet unanticipated increase in usage
resulting from various uncontrollable factors like

i) An unusual high demand

ii) Late receipt of incoming inventory

The reorder level (ROL) = DLT+ safety stock (SS)

Where DLT = Demand during lead time

= Demand rate × Lead time period (from geometry)

Demand

= day
× LT in days.

Safety Stock (SS) = ko where k = standard normal statistic value for a

given service level & o = standard deviation.
Ex: A firm has a demand distribution during a constant lead time with a
standard deviation of 250 units. The firm wants to provide 98% service

a) How much safety stock should be carried.

b) If the demand during lead time averages 1200 units, what is the
appropriate recorder level. (ROL)?

Corresponding to 98% service level, K valve from normal distribution table =

2.05.

Solution:

a) Safety stock (SS) = ko = 2.05 × 250 = 512 units

b) ROL = DLT + SS = 1200+512 = 1712 units

(C) ABC Analysis

ABC means → Always Better Control

ABC analysis divides inventories into three groupings in terms of percentage of

number of items and percentage of total value. in ABC analysis important
items (high usage valued items) are grouped in C and the remaining middle
level items are considered 'B' items.

The inventory control is exercised on the principle of "management by

exception" i.e., rigorous controls are exercised on A items and routine loose
controls for C items and moderate control in 'B' items. The items classified by
virtue of their uses as:

Category % of items (approx) % value (approx)

A – High value items 10 70
B – Medium value items 20 20
C – Low value items 70 10

Control policies for A items

i) 'A' items are high valued items hence should be ordered in small
quantities in order to reduce capital blockage.
ii) The future requirement must be planned in advanced so that
required quantities arrive a little before they are required for
consumptions.
iii) Purchase and stock control of A items should be taken care by top
executives in purchasing department.
iv) Maximum effort should be made to expedite the delivery.
v) The safety stock should be as less as possible (15 days or less).
vi) 'A' items are subjected to tight control w.r.t.
 Issue
 Balance
 Storing method
vii) Ordering quantities, reorder point and maximum stock level should
be revised more frequently.

Control policies for 'C' items

i) The policies for 'B' items are in general between A & C.

ii) Order for these items must be placed less frequently.
iii) Safety stock should be medium (3 months or less).
iv) 'B' items are subjected to moderate control.
 Control policies for 'C' items

i) 'C' items are low valued items.

ii) Safety stock should be liberal (3 months or more).
iii) Annual or 6 monthly order should be placed to reduce paper work &
ordering cost and to get the advantage of discount.
iv) In case of these items only routine check is required.

Steps for ABC Analysis

1. Calculate the annual usage in units for each items.

2. Calculate the annual usage of each item in terms of rupees.
3. Rank the items from highest annual usage in rupees to lowest annual
usage in rupees.
4. Compute total rupees.
5. Find the % of high, medium and low valued items in terms of total value
of items.

The following example will give a clear and wide information about ABC
analysis. Prepare ABC analysis on the following sample of items in an
inventory.

Item Annual usage unit Unit cost (Rs) Annual usage (Rs) Ranking
a 30,000 0.01 300 6
b 2800 1.5 4200 1
c 300 0.10 30 9
d 1100 0.5 550 4
e 400 0.05 20 10
f 2200 1.0 2200 2
g 1500 0.05 75 8
h 8000 0.05 400 5
i 3000 0.30 900 3
j 800 0.10 80 7

Table showing ABC Analysis (ABC Ranking)

Item Annual usage Cumulative Cumulative Ranking Annual usage Cumulative

(Rs) amount % units %
b 4200 4200 47.97 A 2800 5.88
f 2200 6400 73.10 A 2200 9.98
i 900 7300 83.38 B 3000 15.97
d 550 7850 89.66 B 1100 18.16
h 400 8250 94.23 B 8000 34.13
a 300 8550 97.66 C 30,000 94.01
j 80 8630 98.57 C 800 95.68
g 75 8705 99.43 C 1500 98.60
c 30 8735 99.77 C 300 99.20
e 20 8755 100.0 C 400 100
Accordingly a graph can be plotted.

Benefits of ABC Analysis (By a suitable example)

A company that has not made ABC analysis of its inventory makes 4
orders/year in respect of each item to get 3 months supply of every item.
Taking a sample of 3 items, with different levels of annual consumptions, their
average inventory (which is one half of order quantity) is worked out in the
following table.

Item Annual consumption No. of orders Average working inventory

10 000
A 40,000 4
= 5000
2
1000
B 4000 4
= 500
2
100
C 400 4
= 50
2
Total 12 5550

But keeping the same no. of orders/year (i.e. 12), inventory can be reduced by
39% by segregating them according to their usage value (ABC analysis) as
illustrated in the following table.

Item Annual consumption No. of orders Average working inventory

5000
A 40,000 8
= 2500
2
1333
B 4000 3
= 667
2
400
C 400 1
= 200
2
Total 12 3367
Thus the investment on inventory is reduced.

Applications of ABC analysis

ABC analysis can be effectively used in materials management. Such as

 Controlling raw materials components.

 Controlling work in progress inventories.

Limitations of ABC analysis

1. ABC analysis does not consider all relevant problems of inventory

control such as a firm handling adequately low valued 'C' items.
2. ABC analysis is not periodically revised for which 'C' items like diesel oil
in a firm will become most high valued items during power crisis.
3. The importance of an item is computed based on its consumption value
and not its criticality.
 MODULE – II CHAPTER- 3: PROJECT MANAGEMENT
1. What is a project?
a. Project is an interrelated set of activities that has a definite
starting and ending point resulting in to an unique product. few
examples of project are-
 Constructing a bridge, dam, highway or building.
 Producing an aeroplane, missile or rocket.
 Introducing a new product.
 Installation of a large computer system.
 Construction of a ship.
 Maintenance of major equipment/plant.
 Commissioning of a power plant.
 Conducting national election.
2. Basic steps in project management
Managing a project (regardless of its size and complexity) requires
identifying every activity to be undertaken and planning- when
each activity must begin and end in order to complete the overall
project in time. typically all projects involve the following steps:
 Description of the project.
 Development of network diagram.
 Insertion of time of starting/ending of each activity.
 Analysis of the network diagram.
 Development of the project plan
 Excetion of the project.
 Periodically assessment of the progress of project.
3. Terminologies used in network diagram
(i) Activity: An activity means work/job. it is a time consuming
process. it is represented by an arrow (→) in the network diagram.
as shown below.
Tail → head
(ii) Event : An event is a specific instant of time  marks the "start"
and "end" of an activity.
(iii) Critical path: It is the sequence of activities which decides the
total project duration. Ex.