Classification of Materials

V-E-D Analysis/Classification
 This classification is applied for Spare parts to
be stocked for maintenance of machines and
equipments.


Ø ‘V’ stand for Vital spare parts which can

cause stoppage of the plant, if not available.


 So management is to keep at least one vital

spare part considering its value.
 Ex: Spare parts to be supplied by foreign manufacturer.


2
 V-E-D Analysis/Classification
(Cont.)
 ‘ E ’ stand for Essential Spare Parts are
those whose non-availability may not

adversely affect production .
 Such spare parts easily available from many
sources within the country so low inventory
of essential spare parts is held.


 ‘ D ’ stand for Desirable Spare Parts are

those which if not available, can be
manufactured by the maintenance
department so no stock is held normally.




3
 H-M-L
Analysis/Classification

This analysis stand for

Ø High Value Item ,
Ø Medium Value Item and
Ø Low Value Item .
Based on the unit price of the item.


 Rs. 10,000 High value, Rs. 5,000 to 10,000 as Medium

and below 5,000 as Low Value Items. On this basis
materials management may delegate authority to
various level of purchase officers to sign
purchase order.

4
F-S-N Analysis/Classification

T h is cla ssifica tio n sta n d fo r



§ Fa st-M o vin g ,
 Items which are normally drawn from stores
frequently are classified as Fast Moving Items.
§

§ Slow Moving
 Items which are drawn only once or twice a year
are classified as slow moving items.


§ Non-Moving Items: Not at all drawn for past few

years.



5
G-O-L-F Analysis/Classification

T h is cla ssifica tio n sta n d fo r

G - G o ve rn m e n t

O - O p e n M a rke t

L - Lo ca lM a rke t

F - Fo re ig n M a rke t/ so u rce s .

 Government : For items the buying firm cannot

apply any inventory control system and have to
accept the quota allotted by the
Government .
 6
 G-O-L-F Analysis/Classification
(Cont..)

 Open Market: Bulk of suppliers are

available.


 Local Market : C lass includes those

local suppliers from whom items can be
purchased on cash purchase basis.


 Foreign Market class indicates

foreign suppliers in which import
procedure is involved.
7
 S-O-S
Analysis/Classification

This stand for -



• Seasonal Items and

• Off - Seasonal Items .


 It may beneficial to purchase seasonal items at

low price and keep inventory or purchase at high
price during Off-seasons.


 Based on the fluctuation in prices and availability,

suitable decision has to taken regarding how much
to purchase and at what prices.

8
 Economic Order Quantity
(EOQ) Models

 Inventory control deals with

purchasing material at right time , in
right quantity and also at right
price . Therefore for a particular
production run , it is necessary to
decide the order quantity i . e . how
much material should be ordered at a
time .
9
 Economic Order Quantity
(EOQ) Models

EOQ model system is also know as Fixed-



Order Quantity System.



Order is placed for the same quantity



whenever the inventory on hand

reaches to a certain predetermined
level which is called as Re - order
Level .

10
 Assumptions of Basic EOQ Model
1) Only one product is involved.
2) Annual Demand requirements are known.
3) Demand is spread evenly throughout the year.
4) Demand rate for the item is constant and known with
certainty.
5) No shortage is allowed.
6) Only two relevant costs are there i.e. Carrying Cost &
Ordering Cost.
7) Lead time to receipt of order is constant.
8) Order quantity is received all at once.
9) There are no quantity discounts.
 Basic Inventory Model / Inventory Order Cycle

Order quantity , Q
Demand
Inventory Level
Rate

Reorder point , R

0 Lead Lead Time

time time
Order Order Order Order
placedreceipt placedreceipt

12
 How much to order decision
Calculation Through Basic EOQ Model

Co - Cost of placing order D - Annual demand

C - Annual carrying cost per-unit Q - Order quantity
c
Number of Orders Per Year = D/Q

Annual Ordering cost=No. of orders per year × Cost per order

 = CoD
 Q
 The carrying cost can be calculated using average inventory cost.

Annual Carrying cost = Average inventory level ×Annual Carrying cost per unit

 How much to order decision
Calculation Through Basic EOQ Model

Average Inventory cost = Initial Inventory + Final Inventory

 2
 = Q+0 = Q
 2 2
Q Q
 InitialQ Inventory


 Average Inventory Q/2

Inventory
Level

 0 Final Inventory
 Time

t t t
1 2 3
 How much to order decision
Calculation Through Basic EOQ Model

 Annual Carrying cost = (Q/2)×Cc



 Total Annual Carrying cost = Annual Ordering Cost + Annual Carrying Cost



(D/Q)Co + (Q/2) Cc
TC =
By equating these two cost functions we formulate for Q as follows –


DC o QC c
 TC = +

Q 2
 C oD QC c
=

Q 2

2C 0D
Q2 =
C Where Cc = pCi (Ci=Annual Carrying cost as %)


 c p=unit price of inventory item.

2 C oD
Q opt =
Cc
 EOQ Example
c = Rs. 0.75 per yard C o = Rs.150D = 10,000 yards

2CoD CoD CcQ

Qopt = TCmin = Q
Cc 2+

2 ( 150 )( 10 , 000 ) ( 150 )( 10 , 000 ) ( 0 . 75 )( 2 , 000 )

Qopt = ( 0 . 75 ) TCmin = 2 , 000 +2

Q opt = 2 , 000 yards TC min = Rs . 750 + Rs . 750 = Rs . 1 , 500

Orders per year = D / Q optOrder cycle time = 311 days /( D / Q opt )

= 10 , 000 / 2 , 000 = 311 / 5
= 5 orders / year = 62 . 2 store days
16
 Calculation of Cycle
Time
• The period between orders is
known as the Cycle Time which
is determined as follows –
Optimal Number of Orders per

Year = N
N = D / Q opt = D =
D Cc
 2DC o
2C o
 Cc
 Calculation of Cycle
Time ( Cont …)
Thus ,
The Cycle Time T = No. of Days

per Year Days

i.e. 365 Days

 N N
 = No. of Weeks
Weeks per weeks
i.e.
Year 52
 N N
Months Months
 = No. of Months
i.e. per
Year 12
 N N
 EOQ Model for Quantity
Discount
• The basic EOQ model can be
used to determine the
optimal order size with
quantity discounts so that
the basic EOQ model is
slightly altered.
• The total cost function must
include the purchase order price
as follows –
 TC = D Co + Q Cc +
Dp
 EOQ Model for Quantity
Discount ( Cont ..)
• Quantity discounts can be
calculated using the basic EOQ
model under two different
options as follows –
1)With constant carrying cost
2)With carrying cost as a
percentage of the purchase
price
 in this carrying cost will vary
with the change in price if it
 EOQ Model for Quantity
Discount ( Cont ..)
• For example
 Q opt = 2DCo

pCi Where p is unit
price and Ci is the carrying cost as a %.

If the supplier gives
the following discounts –
Order size 0 to Q1 - Discount X1%
Unit price p1
Order size>Q 1 < Q 2 - Discount X2%

Unit price p2
 EOQ Model for Quantity
Discount ( Cont ..)
• The EOQ model provides EOQ =
Q opt = 2DC o

pC i
With three discount

categories providing three

different unit price , we
obtain –
 Q opt 1 = 2DC o

p1Ci
So on .. for p2 n p3 ..
 EOQ Model for Quantity
Discount ( Cont ..)
• The slight difference in basic
EOQ model and discount model is
in the carrying cost due to
difference in unit price
otherwise both models are
approximately same.
•
• We have to examine the
feasibility of the optimal order
quantities calculated as –
 EOQ Model for Quantity
Discount ( Cont ..)
TC EOQ = Co +Qo p Ci + D p
D pt
………..Equation 1
Qo
Q2o

pt
TC DiscD = pt + pDisc Ci + D p Disc
………..QEquation
o 2
 pt 2
By equating equation 1 & 2

If TC EOQ TC Disc do not accept the

discount offer.
If TC EOQ TC Disc then accept the
discount offer.
rate of Rs. 25 per piece. The annual
consumption of spark plug is 18,000 nos. If
the ordering cost is Rs. 250 per order and
carrying cost is 25% p.a. what would be the
EOQ? If the supplier of spark plugs offers a
discount of 5% for order quantity of 3,000
nos. per order, do you accept the discount
offer?
Annual demand (D) = 18,000 nos.
Unit price (P) = Rs. 25/-
Ordering cost per order (Co) = Rs.
250/-
Carrying charges (as % ) (Ci) = 25 %


EOQ =


2DCo

PCi
 EOQ = 2×18,000×250
 25×0.25


 = 1200 nos.
1 ) Discount offer for Q = 3 , 000 .
a) EOQ option=

TC EOQ =
 DP + Co +
P CiD ………..Equation 1
Q
120


Q 2
= 18,000 ×18
25+ 0 ×250 + 25

,00
× 25× 0 10
2 0


= 18,000 ×25 +
× 250 + 18,00 1200 × 2525×
0
100

2
= 4,50,000
1200+ 3750 + 3750
= Rs . 4 , 57 , 500
b) Discount Option:
 Discount offered for order quantity
Q of 3000 nos. = 5% of unit price
 New price after discount P Disc =
0.95 × 25 = 23.75
D D
TC Disc = Dp Disc Co +
pDisc Ci Q1 Q1 3,00

18,00 0
0
 = 18,000 23.75 + 2
× 250 + 3,000 × 23.75 × 0.25


 = 4,27, 500 + 1500 + 8906.25

 = Rs . 4 , 37 , 906 . 25
 What is Logistics?

Logistics is the . . .
“ process of planning ,
implementing , and controlling
the efficient , effective flow
and storage of goods ,
services , and related
information from point of
origin to point of
consumption for the purpose
of conforming to customer
requirements .“
 Supply Chain Management

Supply Chain:
A network of activities that deliver a finished

product or service to the customer.

– The connected links of external suppliers,
internal processes, and external
distributors.
–
External Internal External
Suppliers Functions Distributors

INFORMATION
 What is a Supply Chain?
• It is not a “ one - way ”
chain , but a network of
stages
• Consists of all stages
involved in fulfilling
customer demand
• Includes : Manufacturers ,
External Suppliers ,
Transporters , Warehouses ,
 Supply Chain
Management


 “ Supply Chain Management

deals with the management
of materials , information ,
and financial flows in a
network consisting of
suppliers , manufacturers ,
distributors , and
customers . ”

 Another Schematic
Representation
Upstream
Downstream

Supplie Pre-
rs assembl Manfr Warehouses Customers
y Plant
s
 Example: Dell
• Customer
• Website
• Assembly Plants
• Warehouses
• Dell’s suppliers and their suppliers
• Dell “builds-to-order”
• Dell does not have retailers,
wholesalers
Thank You