Unit 4

Material requirements planning (MRP) - is a system for calculating the materials and components
needed to manufacture a product. It consists of three primary steps: taking inventory of the materials and
components on hand, identifying which additional ones are needed and then scheduling their production
or purchase.

A master production schedule (MPS) is the overall plan to assess the production of your finished
goods, detailing what you need to produce, how much you need to produce, and when you need to produce
it. In short, it contains any relevant information related to production, including time frames, such as your
manufacturing lead time.

How do manufacturers use a master production schedule?

The most profitable goods for your business will likely make up most of the resources needed for
production. Ultimately, manufacturers use their master production schedule to help them:
• Understand what needs to be produced
• How big should a batch be
• When should they be scheduled
• The manufacturing route should their products follow

Difference between MRP and MPS.

MPS operates only within one level of an item’s BOM, while MRP can be utilized at every level. MRP
focuses its planning capabilities more on meeting the demand for component parts or sub assemblies, while
MPS focuses more on establishing production plans to satisfy the actual demand for finished products, as
well as to meet projected customer delivery dates.

Enterprise resource planning (ERP) is a platform companies use to manage and integrate the
essential parts of their businesses. Many ERP software applications are critical to companies because they
help them implement resource planning by integrating all the processes needed to run their companies with
a single system.

Benefits of ERP
Some benefits of ERP include the free flow of communication between business areas, a single source of
information, and accurate, real-time data reporting.

Most Widely Used ERP Modules

● Finance
● Human Resources Management
● Sourcing and Procurement
● Sales
● Manufacturing
● Logistics and Supply Chain Management
 ● Service
● R & D Engineering
● Enterprise Asset Management

Bill of Materials (BOM)

- an extensive list of raw materials, components and instruction required to construct,
manufacture or repair a product or service. A bill of materials usually appears in a hierarchical
format, with the highest level displaying the finished product and the bottom level showing
individual components and materials.

BOM DISPLAYS

In an explosion display, the BOM starts with the highest level of the product — say, computer
motherboard — at the top. It then breaks the product down into components and parts that become
increasingly more granular.level.

An implosion display is the inverse of an explosion display. It starts with individual parts and links
them to form the major product or assembly.

BOM TYPES

An engineering bill of materials defines the design of the finished product. It includes all alternative
and substitute part numbers and parts contained in the drawing notes.

A manufacturing bill of materials (BOM) comprises all the assemblies and parts required to construct
a finished item ready to be shipped. It also incorporates the packaging materials required to send the
product to the customer.

BOM STRUCTURES

In a single-level BOM, each part that will make up the product or asset is shown once, along with the
quantity needed. It’s similar to a shopping list.

A multi-level BOM shows the relationship (sometimes called parent-child) between components, sub-
assemblies and assemblies. It often does this by indenting the materials and/or subassemblies that make
up the higher-level part or assembly.

Inventory Record
- Contains data about the items a company has in stock, such as the amount of inventory on hand,
what's been sold and reordered, what's on order, the product's value, and where it's stored.

The material requirements planning (MRP) netting process is the way MRP carries out
calculations on a level-by-level basis down through a Bill of Materials, which converts the Master
Production Schedule of finished products into suggested or planned orders for all the subassemblies,
components, and raw materials.

MRP Capacity Checks

The MRP process needs a feedback loop to check whether a plan was achievable and whether it has
actually been achieved. Closing this planning loop in MRP systems involves checking production plans
against available capacity and, if the proposed plans are not achievable at any level, revising them.

Unit 5

Supply network design refers to the process of optimizing the structure and configuration of a
company’s supply chain network to meet its strategic and operational goals. This involves making
decisions about the number and location of facilities, transportation routes, inventory levels, and
sourcing strategies.

The goal of supply network design is to create a cost-effective and efficient supply chain that
can meet the company’s demand while minimizing costs and improving customer satisfaction. This
process involves analyzing data and simulation techniques to identify the most efficient supply chain
configuration.

CONFIGURING THE SUPPLY NETWORK

- It refers to the process of designing and optimizing the flow of goods, information, and
resources within a supply chain. It involves the selection of suppliers, parts, processes and
transportation modes.This process is essential for organizations to meet their goals, enhance
customer satisfaction, and gain a competitive edge in the market

Outsourcing
- It introduces the concept of outsourcing, which involves assessing which functions or
activities within the supply chain should be delegated to third-party service providers.

Vertical integration is explained as the strategy of owning and controlling various

stages of the supply chain, including suppliers or distribution
channels. It is also a business strategy in which a company controls multiple stages of its production
process and supply chain, minimizing or eliminating the need for outside entities.

1. Backward integration- refers to acquiring or merging with businesses that supply the inputs or
raw materials for the company's products or services. For example, a coffee shop might buy a coffee
plantation or a roaster.

2. Forward integration- refers to acquiring or merging with businesses that distribute or sell the
company's products or services. For example, a publisher might own a bookstore or a website.
Outsourcing
- Describes when a business obtains a product or service from an outside provider, rather than
handling it in-house.

Onshoring
- Within national borders.

Nearshoring
- Neighboring countries.

Offshoring
- Another country.

Multisourcing
- More than one service provider or manufacturer.

Crowdsourcing
- Large group of people.

Location Techniques
a. Weighted - score method
● The scale of the score is Arbitrary. For example, 0-100
b. The centre-of-gravity method
● Location which minimizes transportation costs.

Unit 6

Traditional inventory management involves manually tracking and managing inventory levels. This
process is time-consuming and requires a lot of resources. It involves counting and recording inventory
levels, updating records manually, and tracking inventory movement. The process is prone to errors, and
it isn’t easy to track inventory in real-time.

Inventory Control Ratio

The inventory ratio comes under the activity ratio. The inventory ratio helps the company know how many
times a certain
company has to replace or sell the stock within a time frame. The same is calculated by dividing the
average inventory from the total cost of goods sold.

Diff. types of Inventory Control Ratios

Inventory Turnover Ratio: It is the ratio that depicts the frequency at which an entity cycles through its
stock or inventory. This ratio can be well interpreted for inventory details within a shorter period.
The formula to calculate this is:
Investor Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory

Gross Margin Return On Investment (GMROI): The ratio obtained in this case lets organizations
and stakeholders know if the businesses are making profits out of their inventory.
This helps businesses learn about the profit they make on the inventory they
have.

It is calculated using the following formula:

GMROI = Net Sales / Average Inventory * Gross Margin
Where Gross Margin = (Net Sales – COGS) / Net Sales

Holding Inventory Ratio: This ratio helps businesses calculate the cost of holding inventory before they
are sold. The figure
involves the cost of storage, labor, insurance, etc.

To calculate this, the following formula is:

Holding Inventory Ratio = Holding costs or expenses / Average Inventory Value

Days Sales of Inventory Ratio: It calculates the number of days an inventory is held by a company
before being sold.

The formula to calculate it is as follows:

Days Sales of Inventory = Average / Net Sales * No. of days in a year

When these ratios are calculated and studied particularly, reliable results, depicting the frequency
of a business replacing and selling the stocks becomes easier.

The two bin system is, quite literally, a system which uses two physical bins to manage inventory,
usually of small but critical parts (such as fasteners and class C components). It’s a simple pull system,
where the parts are supplied by two rotating containers.

The perpetual inventory system keeps track of inventory balances continuously. This is done through
computerized systems using point-of-sale (POS) and enterprise asset management technology that record
inventory purchases and sales. It is far more sophisticated than the periodic system of inventory
management

The periodic order system is often used by smaller businesses that have easy-to-manage inventory
and may not have a lot of money or the opportunity to implement computerized systems into their
workflow. As such, they use occasional physical counts to measure their inventory and the cost of goods
sold (COGS).
Economic order quantity (EOQ) is a calculation companies perform that represents their ideal order
size, allowing them to meet demand without overspending. Inventory managers calculate EOQ to
minimize holding costs and excess inventory. Economic order quantity is a useful metric for businesses
that buy and hold inventory for manufacturing, resale, internal use or any other purpose. Businesses that
follow EOQ look at all costs related to purchasing and delivery while also factoring in demand for the
product, purchase discounts and holding costs.

A reorder point (ROP) is the level of inventory at which a business should place a new order or run the
risk that stock will drop below a comfortable level, or even down to zero — leaving customers unhappy
and orders unfulfilled. Usually, ROP refers to buying inventory to replenish stock.

Reorder point = (daily sales velocity) × (lead time in days) + safety stock

Fixing Stock Levels

The minimum stock level is the lowest quantity of a product that a company wants to have on hand at
any given time to avoid stockouts or backorders

Formula: Minimum Stock Level = Average Daily Demand X Average Time to Sell

The maximum stock level is the largest number of goods a company can store to provide its customers
with service at the lowest possible cost. It’s vital to keep inventory control in line with demand.

Formula: Maximum stock level = Reorder point + Replenishment quantity

- (Minimum demand x Lead time)

Danger level is not an ideal stock level to place an order because at this level the companies need to
make the materials or inventory available on urgent basis which could increase transportation charges
and overall inventory cost.

Formula: Average daily usage × Lead time for the emergency supply

ABC Analysis
- Is a widely used technique that classifies inventory items into three categories: A, B and C. A
items represent the most valuable items, accounting for approximately 80% of the total inventory value
but only 10-20% of the total number of items. B items represent moderately valuable items, while C
items represent the least valuable items.

Annual number of units sold (per item) x cost per unit

VED Analysis
- classifies inventory items based on their criticality to the production process. This technique is
particularly useful in
manufacturing environments where certain components are vital for the production of finished goods.

SDE analysis classifies materials based on the availability of an item and procurement difficulty. This
prioritizes items and allocates resources effectively, depending on whether a material is freely available or
scarce. It also considers the number of days of its lead
time.

S- scarce
D- difficult
E- easy

FSN analysis helps in classifying inventory analysis based on consumption rate. It is an

effective method to understand and articulately forecast demand. It is useful for analyzing fast-
moving, slow-moving goods and non-moving items.

The Purpose of FSN analysis is to consider quantity, the rate of consumption of products and how
often they are issued or used and to use this information to guide decisions about placement in the
warehouse (considering picking and packing to reduce time and labor), frequency of reordering or even
phasing out of certain items.

F- fast moving
S- slow moving
N- non-moving

Formula to calculate average stay of a product:

Average stay = cumulative no. of inventory holding days [or unit of time] ÷ (total quantity
of items received + opening balance)

Formula to calculate the consumption rate of a product:

Consumption rate = Total issue quantity ÷ Total duration

Formula to calculate the cumulative average stay:

Cumulative average stay = average stay of item + average stays of all items that stay
longer in inventory than itself

Formula to calculate the cumulative consumption rate:

Cumulative consumption rate = consumption rate of item + consumption rate of all items
consumed faster than itself

Formula to calculate percentage average stay of a product:

Percentage average stay = (cumulative average stay of item ÷ cumulative average stay of
all items) x 100

Formula to calculate percentage consumption rate of a product:

Percentage consumption rate = (cumulative consumption rate of item ÷ cumulative
consumption rate of all items) x 100

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders
from suppliers directly with production schedules. Companies employ this inventory strategy to increase
efficiency and decrease waste by receiving goods only as they need them for the production process,
which reduces inventory costs. This method requires producers to forecast demand accurately.