UNIT -5

Production Planning and Control

INTRODUCTION
Production Planning is a managerial function which is mainly concerned with
the following important issues:

What production facilities are required?

How these production facilities should be laid down in the space available for
production? and
How they should be used to produce the desired products at the desired rate of production?

Broadly speaking, production planning is concerned with two main aspects: (i) routing or
planning work tasks (ii) layout or spatial relationship between the resources. Production
planning is dynamic in nature and always remains in fluid state as plans may have to be
changed according to the changes in circumstances.

Production control is a mechanism to monitor the execution of the plans. It has several
important functions:
• Making sure that production operations are started at planned places and planned times.
• Observing progress of the operations and recording improperly.
• Analyzing the recorded data with the plans and measuring the deviations.
• Taking immediate corrective actions to minimize the negative impact of
deviations from the plans.
• Feeding back the recorded information to the planning section in order to
improve future plans.

OBJECTIVES AND BENEFITS

• Minimize costs / maximize profits

• Maximize customer service
• Minimize inventory investment
• Minimize changes in production rates
• Minimize changes in work-force levels
• Maximize the utilization of plant and equipment
FUNCTIONS OF PRODUCTION CONTROL
• Production function encompasses the activities of procurement, allocation and utilization ofresources.
• The main objective of production function is to produce the goods and services
demanded by the customers in the most efficient and economical way.
• Therefore, efficient management of the production function is of utmost importance in order to
achieve this objective.
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A block diagram depicting the architecture of a control system is shown in Figure

Figure 1: Architecture of Control System

Important functions covered by production planning and control (PPC) function in

any manufacturing system are shown in Table1along with the issues to be covered.
Table 1: Production Planning and control Functions

Functions Issues to be covered

Product
Design& Customer needs, market needs, availability of similar product, demand-supply gap,
Developm functional aspects, operational aspects, environmental aspects etc.
ent nt
Demand Quantity, Quality,
Demand pattern.
Forecasting

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 Capacity No. of machines, No. of tooling, workers, No.of flow lines, Quantity, Quality and rate
Planning of production, demandpattern.
Equipment
s Selection No. of machines, type of M/c, Quality aspects, Quantity aspects, rate of production,
& Cost of equipments, support from the supplier, maintenance policy, storage of spare
Maintena parts.
n ce
Tooling Compactability between w/c steels, No. of tools, their cost, their material etc, storage
Selection policy.
Material
Selection
& Types, specification, quality aspect, quantity aspect, cost, supplies reputation , lot size,
Manageme inventory levels, setup cost, mode of transportation etc.
nt
Process Generation of manufacture instruction, selection of M/c, tools, parameters, sequence
Planning etc.
Division of work load, assignment of tasks, uniform loading, matching between
Loading capability & capacity with job requirements.
Path selection for material movement as per the process plan and loading, minimum
Routing material handling and waiting time.
Scheduling Time based loading, start and finish times, due dates, dispatching rules, re-scheduling.
Expediting Operation Scheduling and order and progress reporting.

Types of Production Systems

A production system can be defined as a transformation system in which a saleable product or service is created
by working upon a set of inputs. Inputs are usually in the form of men, machine, money, materials etc.
Production systems are usually classified on the basis of the following:

Type of product,
Type of production line,
Rate of production,
Equipments used etc.
They are broadly classified into three categories:
Job shop production
Batch production
Mass production
Job shop Production
In this system products are made to satisfy a specific order. However that order may be produced only once or at
irregular time intervals as and when new order arrives or at regular time intervals to satisfy a continuous demand
The following are the important characteristics of job shop type production system:
• Machines and methods employed should be general purpose as product changes are quite
frequent.
• Planning and control system should be flexible enough to deal with the frequent changes in
product requirements.
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 •
• Man power should be skilled enough to deal with changing work conditions.
• Schedules are actually nonexistent in this system as no definite data is available on the
product.
• In process inventory will usually be high as accurate plans and schedules do not exist.
Product cost is normally high because of high material and labor costs.
• Grouping of machines is done on functional basis (i.e. as lathe section, milling section etc.)
This system is very flexible as management has to manufacture varying product types.
• Material handling systems are also flexible to meet changing product requirements.
Batch Production
Batch production is the manufacture of a number of identical articles either to meet a specific
order or to meet a continuous demand. Batch can be manufactured either-only once or repeatedly
at irregular time intervals as and when demand arise or repeatedly at regular time intervals to
satisfy a continuous demand The following are the important characteristics of batch type
production system:
• As final product is somewhat standard and manufactured in batches, economy of scale
can be availed to some extent.
• Machines are grouped on functional basis similar to the job shop manufacturing.
• Semi automatic, special purpose automatic machines are generally used to take
advantage of the similarity among the products.
• Labor should be skilled enough to work upon different product batches.
• In process inventory is usually high owing to the type of layout and material handling
policies adopted.
• Semi automatic material handling systems are most appropriate in conjunction with the
semi automatic machines.
Mass Production

In mass production, same type of product is manufactured to meet the continuous demand of the
product. Usually demand of the product is very high and market is going to sustain same demand
for sufficiently long time.
The following are the important characteristics of mass production system:

As same product is manufactured for sufficiently long time, machines can be laid down in
order of processing sequence. Product type layout is most appropriate for mass
production system.
Standard methods and machines are used during part
manufacture. Most of the equipments are semi automatic or
automatic in nature. Material handling is also automatic (such as
conveyors).
Semi skilled workers are normally employed as most of the facilities are automatic.
As product flows along a pre defined line, planning and control of the system is much easier.
Cost of production is low owing to the high rate of production.
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 In process inventories are low as production scheduling is simple and can be implemented
with ease.

PRODUCT DESIGN

Product design is a strategic decision as the image and profit earning capacity of a small
firm depends largely on product design. Once the product to be produced is decided by the
entrepreneur the next step is to prepare its design. Product design consists of form and
function. The form designing includes decisions regarding its shape, size, color and
appearance of the product. The functional design involves the working conditions of the
product. Once a product is designed, it prevails for a long time therefore various factors are
to be considered before designing it. These factors are listed below: -
(a) Standardization
(b) Reliability
(c) Maintainability
(d) Servicing
(e) Reproducibility
(f) Sustainability
(g) Product simplification
(h) Quality Commensuration with cost
(i) Product value
(j) Consumer quality
(k) Needs and tastes of consumers.
Above all, the product design should be dictated by the market demand. It is an important
decision and therefore the entrepreneur should pay due effort, time, energy and attention
in order to get the best results.
TYPES OF PRODUCTION

Broadly one can think of three types of production systems which are
mentioned here under: -
(a) Continuous production
(b) Job or unit production
(c) Intermittent production

(a) Continuous production: - It refers to the production of standardized products with a standard
set of process and operation sequence in anticipation of demand. It is also known as mass flow
production or assembly line production This system ensures less work in process inventory and
high product quality but involves large investment in machinery and equipment. The system is
suitable in 117plants involving large volume and small variety of output e.g. oil refineries reform
cement manufacturing etc.

(b) Job or Unit production: - It involves production as per customer's specification each batch
or order consists of a small lot of identical products and is different from other batches. The
system requires comparatively smaller investment in machines and equipment. It is flexible and
can be adapted to changes in product design and order size without much inconvenience. This
system is most suitable where heterogeneous products are produced against specific orders.

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 (c) Intermittent Production: Under this system the goods are produced partly for inventory
and partly for customer's orders. E.g. components are made for inventory but they are combined
differently for different customers. Automobile plants, printing presses, electrical goods plant
are examples of this type of manufacturing.
Intermittent production

• Under this system the goods are produced partly for inventory and partly for customer's orders.
• E.g. components are made for inventory but they are combined differently for different customers..
• Automobile plants, printing presses, electrical goods plant

MARKETING ASPECT

• Sales and Marketing is a key function whose participation is often hard to enlist.

• Sales and Marketing are critical functions in this process, since they provide the starting point of the

planning and scheduling process ‑‑ the forecasts and customer order demands

• They are also vital from the viewpoint of providing the proper customer perspective whenever changes
need to be made to plans and schedules based on mismatches of resources to customer demands.

• Only with a proper level of participation in Planning and Scheduling, can Sales and Marketing optimally

leverage its performance and create a trusting and consensus based working relationship with

Manufacturing, Purchasing, Planning, Engineering and all other functions in the company.

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Standardization

• Sizes for screws, nuts bolts and other threaded fasteners were first standardized based on work of by
JosephWhitworth..
• Pipe sizes
• Shoe size standardization
• The screw base size and thread dimensions of electric lamp bulbs was standardized by Thomas Edison.

• Electrical voltage and frequency

• Electrical wiring and device standards

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 UNIT -5
Production Planning and Control

The growing competition, frequent changes in customer's demand and the trend towards
automation demand that decisions in business should not be based purely on guesses rather on a
careful analysis of data concerning the future course of events. More time and attention should be
given to the future than to the past, and the question 'what is likely to happen?' should take
precedence over 'what has happened?' though no attempt to answer the first can be made without
the facts and figures being available to answer the second. When estimates of future conditions are
made on a systematic basis, the process is called forecasting and the figure or statement thus
obtained is defined as forecast.

In a world where future is not known with certainty, virtually every business and economic decision
rests upon a forecast of future conditions. Forecasting aims at reducing the area of uncertainty that
surrounds management decision-making with respect to costs, profit, sales, production, pricing,
capital investment, and so forth. If the future were known with certainty, forecasting would be
unnecessary. But uncertainty does exist, future outcomes are rarely assured and, therefore,
organized system of forecasting is necessary. The following are the main functions offorecasting:

The creation of plans of action.

The general use of forecasting is to be found in monitoring the continuing progress of
plans based on forecasts.
The forecast provides a warning system of the critical factors to be monitored regularly
because they might drastically affect the performance of the plan.

It is important to note that the objective of business forecasting is not to determine a curve or series
of figures that will tell exactly what will happen, say, a year in advance, but it is to make analysis
based on definite statistical data, which will enable an executive to take advantage of future
conditions to a greater extent than he could do without them. In forecasting one should note that it
is impossible to forecast the future precisely and there always must be some range of error allowed
for in the forecast.

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FORECASTING FUNDAMENTALS

Forecast: A prediction, projection, or estimate of some future activity, event, or occurrence.

Types of Forecasts

- Economic forecasts
o Predict a variety of economic indicators, like money supply, inflation rates,
interest rates, etc.
- Technological forecasts
o Predict rates of technological progress and innovation.
- Demand forecasts
o Predict the future demand for a company’s products orservices.

Since virtually all the operations management decisions (in both the strategic category and the
tactical category) require as input a good estimate of future demand, this is the type of
forecasting that is emphasized in our textbook and in this course.

TYPES OF FORECASTING METHODS

Qualitative methods: These types of forecasting methods are based on judgments, opinions,
intuition, emotions, or personal experiences and are subjective in nature. They do not rely on
any rigorous mathematical computations

Quantitative methods: These types of forecasting methods are based on mathematical

(quantitative) models, and are objective in nature. They rely heavily on mathematical
computations.

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 UNIT -5
Production Planning and Control

TIME SERIES MODELS

Model Description

Naïve Uses last period’s actual value as a forecast

Simple Mean (Average) Uses an average of all past data as a forecast

Uses an average of a specified number of the most

Simple Moving Average recent observations, with each observation receiving the
same emphasis (weight)
Uses an average of a specified number of the most
Weighted Moving Average recent observations, with each observation receiving a
different emphasis (weight)
A weighted average procedure with weights declining
Exponential Smoothing
exponentially as data become older

Trend Projection Technique that uses the least squares method to fit a
straight line to the data
A mechanism for adjusting the forecast to accommodate
Seasonal Indexes any seasonal patterns inherent in the data

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 DECOMPOSITION OF A TIME SERIES

Patterns that may be present in a time series

Trend: Data exhibit a steady growth or decline over time.

Seasonality: Data exhibit upward and downward swings in a short to intermediate time frame (most
notably during a year).

Cycles: Data exhibit upward and downward swings in over a very long time frame.

Random variations: Erratic and unpredictable variation in the data over time with no discernable
pattern.

ILLUSTRATION OF TIME SERIES DECOMPOSITION

Hypothetical Pattern of Historical Demand

Dependent versus Independent Demand

Demand of an item is termed as independent when it remains unaffected by the demand for any
other item. On the other hand, when the demand of one item is linked to the demand for another
item, demand is termed as dependent. It is important to mention that only independent demand
needs forecasting. Dependent demand can be derived from the demand of independent item to
which it is linked.

Business Time Series

The first step in making a forecast consists of gathering information from the past. One should
collect statistical data recorded at successive intervals of time. Such a data is usually referred to as
time series. Analysts plot demand data on a time scale, study the plot and look for consistent
shapes and patterns. A time series of demand may have constant, trend, or seasonal pattern ( Figure
1)
Figure 1: Business Time Series

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 or some combination of these patterns. The forecaster tries to understand the reasons for
such changes, such as,

Changes that have occurred as a result of general tendency of the data to increase
or decrease, known as secular movements.
Changes that have taken place during a period of 12 months as a result in changes in
climate, weather conditions, festivals etc. are called as seasonal changes.
Changes that have taken place as a result of booms and depressions are called as
cyclical variations.
Changes that have taken place as a result of such forces that could not be predicted
(like flood, earthquake etc.) are called as irregular or erratic variations.

Quantitative Approaches of Forecasting

Most of the quantitative techniques calculate demand forecast as an average from the past
demand. The following are the important demand forecasting techniques.

Simple average method: A simple average of demands occurring in all previous time periods is
taken as the demand forecast for the next time period in this method. ( Example 1)

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 Unit 5

Inventory Management:
In any business or organization, all functions are interlinked and connected to each
other and are often overlapping. Some key aspects like supply chain management, logistics
and inventory form the backbone of the business delivery function. Therefore these functions
are extremely important to marketing managers as well as finance controllers.

Inventory management is a very important function that determines the health of the
supply chain as well as the impacts the financial health of the balance sheet. Every
organization constantly strives to maintain optimum inventory to be able to meet its
requirements and avoid over or under inventory that can impact the financial figures.

Inventory is always dynamic. Inventory management requires constant and careful

evaluation of external and internal factors and control through planning and review. Most of
the organizations have a separate department or job function called inventory planners who
continuously monitor, control and review inventory and interface with production, procument
and finance departments.
Different Types of Inventory:

Inventory of materials occurs at various stages and departments of an organization. A

manufacturing organization holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG Stores, distribution centers
etc. Further both raw materials and finished goods those that are in transit at various locations
also form a part of inventory depending upon who owns the inventory at the particular
juncture. Finished goods inventory is held by the organization at various stocking points or
with dealers and stockiest until it reaches the market and end customers.

Besides Raw materials and finished goods, organizations also hold inventories of
spare parts to service the products. Defective products, defective parts and scrap also forms a
part of inventory as long as these items are inventoried in the books of the company and have
economic value.

Types of Inventory by Function:

INPUT PROCESS OUTPUT

Raw Materials Work In Process Finished Goods

Consumables required for Semi Finished Production in Finished Goods at Distribution

processing. Eg : Fuel, various stages, lying with Centers through out Supply
Stationary, Bolts & Nuts etc. various departments like Chain
required in manufacturing Production, WIP Stores, QC,
Final Assembly, Paint Shop,
Packing, Outbound Store etc.

Maintenance Production Waste and Scrap Finished Goods in transit

Items/Consumables

Packing Materials Rejections and Defectives Finished Goods with Stockiest

and Dealers

Local purchased Items required Spare Parts Stocks & Bought

for production Out items

Defectives, Rejects and Sales

Returns

Repaired Stock and Parts,

salels promotion & sample

stocks
Functions of Inventories:
The basic purpose of inventories is to balance supply and demand.

Inventory serves as a link between:

1. Supply and demand

2. Customer demand and finished goods

3. Finished goods and component availability.

4. Requirements for an operation and the output from the preceding operation.

5. Parts and materials to begin production and the suppliers of materials.

Why Inventories?
Inventories are needed because demand and supply can not be matched for physical
and economical reasons. There are several other reasons for carrying inventories in any
organization.

➢ To safe guard against the uncertainties in price fluctuations, supply conditions,

demand conditions, lead times, transport contingencies etc.
➢ To reduce machine idle times by providing enough in-process inventories at
appropriate locations.
➢ To take advantages of quantity discounts, economy of scale in transportation etc.
➢ To decouple operations i.e. to make one operation's supply independent of another's
supply. This helps in minimizing the impact of break downs, shortages etc. on the
performance of the downstream operations. Moreover operations can be scheduled
independent of each other if operations are decoupled.
➢ To reduce the material handling cost of semi-finished products by moving them in
large quantities between operations.
➢ To reduce clerical cost associated with order preparation, order procurement etc.

Relevant Inventory Costs:

In order to control inventories appropriately, one has to consider all cost elements that
are associated with the inventories. There are four such cost elements, which do affect cost of
inventory.

➢ Unit cost: it is usually the purchase price of the item under consideration. If unit cost
is related with the purchase quantity, it is called as discount price.
➢ Procurement costs: This includes the cost of order preparation, tender placement, cost
of postages, telephone costs, receiving costs, set up cost etc.
 ➢ Carrying costs: This represents the cost of maintaining inventories in the plant. It
includes the cost of insurance, security, warehouse rent, taxes, interest on capital
engaged, spoilage, breakage etc.
➢ Stock out costs: This represents the cost of loss of demand due to shortage in supplies.
This includes cost of loss of profit, loss of customer, loss of goodwill, penalty etc.

If one year planning horizon is used, the total annual cost of inventory can be expressed as:

Total annual inventory cost = Cost of items + Annual procurement cost + Annual carrying
cost + Stock out cost

Variables in Inventory Models

D = Total annual demand (in units) Q = Quantity ordered (in units)

Q* = Optimal order quantity (in units) R = Reorder point (in units)

R* = Optimal reorder point (in units) L = Lead time

S = Procurement cost (per order)

C = Cost of the individual item (cost per unit)

I = Carrying cost per unit carried (as a percentage of unit cost C) K = Stock out cost per unit
out of stock

P = Production rate or delivery rate

dl = Demand per unit time during lead time

Dl = Total demand during lead time

TC = Total annual inventory costs

TC* = Minimum total annual inventory costs

AnnualDemand D
Number of orders per year = = =
OrderQuantity Q

Total procurement cost per year = S.D / Q

Total carrying cost per year = Carrying cost per unit * unit cost * average inventory per cycle
Cost of items per year = Annual demand * unit cost

= D.C
S.D I.C.Q
Total annual inventory cost (TC) = D.C+ +
Q 2

The objective of inventory management team is to minimize the total annual inventory cost.
A simplified graphical presentation in which cost of items, procurement cost and carrying
cost are depicted is shown in Figure 1 . It can be seen that large values of order quantity Q
result in large carrying cost. Similarly, when order quantity Q is large, fewer orders will be
placed and procurement cost will decrease accordingly. The total cost curve indicates that the
minimum cost point lies at the intersection of carrying cost and procurement cost curves.

Figure 1: Inventory Related Costs

Inventory Operating Doctrine

When managing inventories, operations manager has to make two important decisions:

➢ When to reorder the stock (i.e. time to reorder or reorder point)

➢ How much stock to reorder (i.e. order quantity)

Reorder point is usually a predetermined inventory level, which signals the operations
manager to start the procurement process for the next order. Order quantity is the order size.
ABC Analysis:
Inventory is a necessary evil in any organization engaged in production, sale or
trading of products. Inventory is held in various forms including Raw Materials, Semi
Finished Goods, Finished Goods and Spares.

Every unit of inventory has an economic value and is considered an asset of the
organization irrespective of where the inventory is located or in which form it is available.
Even scrap has residual economic value attached to it.

Depending upon the nature of business, the inventory holding patterns may vary.
While in some cases the inventory may be very high in value, in some other cases inventory
may be very high in volumes and number of SKU. Inventory may be help physically at the
manufacturing locations or in a third party warehouse location.

Inventory Controllers are engaged in managing Inventory. Inventory management

involves several critical areas. Primary focus of inventory controllers is to maintain optimum
inventory levels and determine order/replenishment schedules and quantities. They try to
balance inventory all the time and maintain optimum levels to avoid excess inventory or
lower inventory, which can cause damage to the business.

ABC Classification:

Inventory in any organization can run in thousands of part numbers or classifications

and millions of part numbers in quantity. Therefore inventory is required to be classified with
some logic to be able to manage the same.

In most of the organizations inventory is categorized according to ABC Classification

Method, which is based on pare to principle. Here the inventory is classified based on the
value of the units. The principle applied here is based on 80/20 principles. Accordingly the
classification can be as under:

A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.

B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.
C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.

Advantages of ABC Classification:

➢ This kind of categorization of inventory helps one manage the entire volume and
assign relative priority to the right category. For Example A Class items are the high
value items. Hence one is able to monitor the inventory of this category closely to
ensure the inventory level is maintained at optimum levels for any excess inventory
can have huge adverse impact in terms of overall value.
➢ A Category Items: Helps one identify these stocks as high value items and ensure
tight control in terms of process control, physical security as well as audit frequency.
➢ It helps the managers and inventory planners to maintain accurate records and draw
management’s attention to the issue on hand to facilitate instant decision-making.
➢ B Category Items: These can be given second priority with lesser frequency of
review and less tightly controls with adequate documentation, audit controls in place.
 ➢ C Category Items: Can be managed with basic and simple records. Inventory
quantities can be larger with very few periodic reviews.

VED Analysis:
VED stands for vital, essential and desirable. This analysis relates to the classification
of maintenance spare parts and denotes the essentiality of stocking spares.

The spares are split into three categories in order of importance. From the view-points
of functional utility, the effects of non-availability at the time of requirement or the operation,
process, production, plant or equipment and the urgency of replacement in case of
breakdown.

Some spares are so important that their non-availability renders the equipment or a
number of equipment in a process line completely inoperative, or even causes extreme
damage to plant, equipment or human life.

On the other hand some spares are non-functional, serving relatively unimportant
purposes and their replacement can be postponed or alternative methods of repair found. All
these factors will have direct effects on the stocks of spares to be maintained.

V: Vital

Vital items which render the equipment or the whole line operation in a process
totally and immediately inoperative or unsafe; and if these items go out of stock or are not
readily available, there is loss of production for the whole period.

E: Essential

Essential items which reduce the equipment’s performance but do not render it
inoperative or unsafe; non-availability of these items may result in temporary loss of
production or dislocation of production work; replacement can be delayed without affecting
the equipment’s performance seriously; temporary repairs are sometimes possible.

D: Desirable

Desirable items which are mostly non-functional and do not affect the performance of the
equipment.

As the common saying goes “Vital Few — trivial many”, the number of vital spares
in a plant or a particular equipment will only be a few while most of the spares will fall in
‘the desirable and essential’ category.

However, the decision regarding the stock of spares to be maintained will depend not
only on how critical the spares are from the functional point of view (VED analysis) but also
on the annual consumption (user) cost of spares (ABC — analysis) and, therefore, for control
of spare parts both VED and ABC analyses are to be combined.

Inventory Modeling:

This is a quantitative approach for deriving the minimum cost model for the
inventory problem in hand.

Economic Order Quantity (EOQ) Model

This model is applied when objective is to minimize the total annual cost of
inventory in the organization. Economic order quantity is that size of the order
which helps in attaining the above set objective. EOQ model is applicable under
the following conditions.

• Demand per year is deterministic in nature

• Planning period is one year
• Lead time is zero or constant and deterministic in nature
• Replenishment of items is instantaneous
• Demand/consumption rate is uniform and known in advance
• No stock out condition exist in the organization

The total annual cost of the inventory (TC) is given by the following equation in EOQ
model.

The graphical representation of the EOQ model is shown in following Figure.

 Figure: Economic Order Quantity Model (EOQ Model)

Inventory Control system:

1. Two Bin System , Fixed order quantity system or Q-System
2. Periodic inventory ordering system, or P-System

Managing our inventory as a retailer is a humongous task. Inventory management grows

more and more complicated with increase in sales volume and diversification of product
assortments.

Two Bin Systems:

 In a continuous inventory system (also referred to as a perpetual system and a fixed-
order-quantity system), a continual record of the inventory level for every item is
maintained. Whenever the inventory on hand decreases to a predetermined level, referred to
as the reorder point, a new order is placed to replenish the stock of inventory. The order that
is placed is for a fixed amount that minimizes the total inventory costs. This amount, called
the economic order quantity, is discussed in greater detail later.

A positive feature of a continuous system is that the inventory level is continuously

monitored, so management always knows the inventory status. This is advantageous for
critical items such as replacement parts or raw materials and supplies. However, maintaining
a continual record of the amount of inventory on hand can also be costly.

This is a simple method used usually in warehousing where in an item is stored in two
locations or bins in a warehouse and the stock is replenished in the first bin from the second
bin once the first bin is consumed completely. The required quantity to be filled in the second

bin is placed for ordering.

The availability of stock in each bin is calculated based on reorder lead time to ensure enough

stock is made available till the new stock arrives.

Periodic Inventory System

For any business that carries inventory, or products stored for future sale, it is
necessary to keep track of what is currently on hand. Some businesses keep track of inventory
using a periodic inventory system. A periodic inventory system is an inventory system that
updates inventory at the end of a specified period of time. This may mean that they update
their inventory records at the end of each month, quarter, or year. Whenever the period ends,
it generally coincides with the end of a reporting period, or a timeframe for which a report is
drawn on all financial activities that occurred during that time. Common reporting periods
conclude on a quarterly or annual basis.

Since a periodic inventory system only keeps track of inventory periodically

throughout the year and not as inventory is purchased or sold, a physical count of the
inventory must be conducted. A physical count is a complete and exact count of each item in
the inventory done by hand. Some businesses carry hundreds or thousands of products, so
physical counts can be extremely time-consuming. Even for businesses that carry few
products, physical counts can be tedious and may take a lot of time to complete if problems,
such as missing parts or wrong counts, arise.
MRP:
It was discussed in demand forecasting that in the dependent demand situation, if the
demand for an item is known, the demand for other related items can be deduced. For
example, if the demand of an automobile is known, the demand of its sub assemblies and sub
components can easily be deduced. For dependent demand situations, normal reactive
inventory control systems (i.e. EOQ etc.) are not suitable because they result in high
inventory costs and unreliable delivery schedules. More recently, managers have realized that
inventory planning systems (such as materials requirements planning) are better suited for
dependent demand items. MRP is a simple system of calculating arithmetically the
requirements of the input materials at different points of time based on actual production
plan.

MRP can also be defined as a planning and scheduling system to meet time-phased
materials requirements for production operations. MRP always tries to meet the delivery
schedule of end products as specified in the master production schedule.

MRP Objectives
MRP has several objectives, such as:
➢ Reduction in Inventory Cost: By providing the right quantity of material at
right time to meet master production schedule, MRP tries to avoid the cost of
excessive inventory.
➢ Meeting Delivery Schedule: By minimizing the delays in materials
procurement, production decision making, MRP helps avoid delays in production
thereby meeting delivery schedules more consistently.
➢ Improved Performance: By stream lining the production operations and
minimizing the unplanned interruptions, MRP focuses on having all components
available at right place in right quantity at right time.