Material Productivity By T. A. Khan January 2008

Material Productivity Material Productivity

By T. A. KhanBy T. A. Khan

January 2008January 2008

RM ProductivityRM Productivity

Raw materials productivityOutput (value or unit or value added)

Value of Raw material used

How to Increase?

=

Efforts to reduce the cost of input materials.

Material productivity Material productivity

Reduce scrap or waste so that a higher Reduce scrap or waste so that a higher percentage of the raw materials is utilised.percentage of the raw materials is utilised.

Use of non corrosive materials or coatings to Use of non corrosive materials or coatings to increase product life. (e.g. Bridges, highways increase product life. (e.g. Bridges, highways & tools etc.)& tools etc.)

Reduce inventories to get higher returns per Reduce inventories to get higher returns per unit of inventory item.unit of inventory item.

Cost of Input MaterialsCost of Input Materials

Reduce the actual quantity of materials used Reduce the actual quantity of materials used per unit of the finished product.per unit of the finished product. Improve product design.Improve product design. Improve manufacturing processes to:Improve manufacturing processes to:

Enhance product qualityEnhance product quality Reduce material waste.Reduce material waste.

Improve Supplier’s processesImprove Supplier’s processes Reduce inventory costs.Reduce inventory costs.

What is Inventory?What is Inventory?Stock of materialsStored capacityExamples

The Functions of InventoryThe Functions of Inventory

To provide a stock of goods that will To provide a stock of goods that will provide a “selection” for customersprovide a “selection” for customers

To take advantage of quantity discountsTo take advantage of quantity discounts To hedge against inflation and upward price To hedge against inflation and upward price

changes.changes. Protect against shortagesProtect against shortages WIP decouples production stagesWIP decouples production stages

The Functions of InventoryThe Functions of Inventory

Independence of operationsIndependence of operations Decouple production & distributionDecouple production & distribution

permits constant production quantitiespermits constant production quantities Variation in demandVariation in demand Flexibility in schedulingFlexibility in scheduling Supply (lead-time) variabilitySupply (lead-time) variability Economic purchase order sizeEconomic purchase order size

Disadvantages of InventoryDisadvantages of Inventory

Higher costsHigher costs Item cost (cost of the item)Item cost (cost of the item) Ordering (or setup) costOrdering (or setup) cost

cost of forms, clerk’s wages, EDI systemcost of forms, clerk’s wages, EDI system Holding (or carrying) costHolding (or carrying) cost

Building lease, insurance, money tied upBuilding lease, insurance, money tied up

Difficult to controlDifficult to control Hides production problemsHides production problems

Types of InventoryTypes of Inventory

Raw materialRaw material Work-in-progressWork-in-progress Maintenance/repair/operating supplyMaintenance/repair/operating supply Finished goodsFinished goods DefectivesDefectives ReturnsReturns

Performance and WIP LevelPerformance and WIP Level

Less WIP means products go through system fasterLess WIP means products go through system faster reducing the WIP makes you more sensitive to reducing the WIP makes you more sensitive to

problems, helps you find problems fasterproblems, helps you find problems faster Stream and Rocks analogy:Stream and Rocks analogy:

Inventory (WIP) is like water in a streamInventory (WIP) is like water in a stream It hides the rocksIt hides the rocks Rocks force you to keep a lot of water (WIP) in the streamRocks force you to keep a lot of water (WIP) in the stream

Lowering Inventory Reduces Lowering Inventory Reduces WasteWaste

WIP hides problems


WIP hides problems


Reducing WIP makesproblem very visible

STOP


Remove problem, runWith less WIP


Reduce WIP again to findnew problems

The Material Flow CycleThe Material Flow Cycle

The Material Flow CycleThe Material Flow Cycle

1 Run timeRun time: : Job is at machine and being worked onJob is at machine and being worked on2 Setup timeSetup time: Job is at the work station, and the work : Job is at the work station, and the work

station is being "setup."station is being "setup."3 Queue timeQueue time: Job is where it should be, but is not being : Job is where it should be, but is not being

processed because other work precedes it.processed because other work precedes it.4 Move timeMove time: The time a job spends in transit: The time a job spends in transit5 Wait timeWait time: When one process is finished, but the job is : When one process is finished, but the job is

waiting to be moved to the next work area.waiting to be moved to the next work area.6 OtherOther: : "Just-in-case" inventory."Just-in-case" inventory.

Other WaitTime

MoveTime

QueueTime

SetupTime

RunTimeInput

Cycle Time

Output

Inventory CostsInventory Costs

Holding costsHolding costs -- associated with holding associated with holding or “carrying” inventory over timeor “carrying” inventory over time

Ordering costsOrdering costs -- associated with costs associated with costs of placing order and receiving goodsof placing order and receiving goods

Setup costsSetup costs - - cost to prepare a machine cost to prepare a machine or process for manufacturing an orderor process for manufacturing an order

Holding (Carrying) CostsHolding (Carrying) Costs ObsolescenceObsolescence InsuranceInsurance Extra staffingExtra staffing InterestInterest PilferagePilferage DamageDamage WarehousingWarehousing Etc.Etc.

Inventory Holding CostsInventory Holding Costs

CategoryCategory % of Value% of Value

Housing (building) costHousing (building) cost 6%6%

Material handlingMaterial handling 3%3%

Labor costLabor cost 3%3%

Opportunity/investmentOpportunity/investment 11%11%

Pilferage/scrap/obsolescencePilferage/scrap/obsolescence 3%3%

Total Holding CostTotal Holding Cost 26%26%

Shrinkage CostsShrinkage Costs

How much is stolen?How much is stolen? 2% for discount, dept. stores, hardware, convenience, 2% for discount, dept. stores, hardware, convenience,

sporting goodssporting goods 3% for toys & hobbies3% for toys & hobbies 1.5% for all else1.5% for all else

Where does the missing stuff go?Where does the missing stuff go? Employees: Employees: 44.5%44.5% Shoplifters: Shoplifters: 32.7%32.7% Administrative / paperwork error: Administrative / paperwork error: 17.5%17.5% Vendor fraud:Vendor fraud: 5.1% 5.1%

ABC AnalysisABC Analysis

Divides on-hand inventory into 3 classesDivides on-hand inventory into 3 classes A class, B class, C classA class, B class, C class

Basis is usually annual $ volumeBasis is usually annual $ volume $ volume = Annual demand x Unit cost$ volume = Annual demand x Unit cost

Policies based on ABC analysisPolicies based on ABC analysis Develop class A suppliers moreDevelop class A suppliers more Give tighter physical control of A itemsGive tighter physical control of A items Forecast A items more carefullyForecast A items more carefully

Classifying Items as ABCClassifying Items as ABC

0

20

40

60

80

100

0 20 40 60 80 100 120

0

20

40

60

80

100

0 20 40 60 80 100 120

AA

BB CC

% Annual $ Usage% Annual $ Usage

% of Inventory Items% of Inventory Items

Ordering CostsOrdering Costs

SuppliesSupplies FormsForms Order processingOrder processing Clerical supportClerical support Etc.Etc.

Setup CostsSetup Costs

Clean-up costsClean-up costs Re-tooling costsRe-tooling costs Adjustment costsAdjustment costs EtcEtc

Inventory ModelsInventory Models

Fixed order-quantity modelsFixed order-quantity models Economic order quantityEconomic order quantity Production order quantityProduction order quantity Quantity discountQuantity discount

Probabilistic modelsProbabilistic models

Fixed order-period modelsFixed order-period models

EOQ AssumptionsEOQ Assumptions

Known and constant Known and constant demanddemand Known and constant Known and constant lead timelead time Instantaneous receiptInstantaneous receipt of material of material NoNo quantity quantity discountsdiscounts Only order (setup) cost and holding costOnly order (setup) cost and holding cost No No stockoutsstockouts

Inventory Usage Over TimeInventory Usage Over Time

Time

Inve

ntor

y Le

vel

AverageInventory

(Q*/2)

0Minimum inventory

Order quantity = Q (maximum inventory level)

Usage Rate

EOQ ModelEOQ ModelHow Much to Order?How Much to Order?

Order quantity

Annual Cost

Holding Cost CurveTotal Cost Curve

Order (Setup) Cost Curve

Optimal Order Quantity (Q*)

Minimum total cost

EOQ Model EquationsEOQ Model Equations

Optimal Order Quantity

Expected Number of Orders

Expected Time Between Orders Working Days / Year

Working Days / Year

= =× ×

= =

= =

=

= ×

Q*D SH

NDQ*

TN

dD

ROP d L

2

D = Demand per year

S = Setup (order) cost per order

H = Holding (carrying) cost

d = Demand per day

L = Lead time in days

Material productivityMaterial productivity

Raw materials productivityOutput (value or unit or value added)

Value of Raw material used =

Value of Raw Material used.

Value of Perfect Requirement

Value of waste

Improve Product Design

Inventory Costs

Improve Manufacturing Process

Improve Material Quality

Optimize Inventory carrying Costs

Optimize Inventory Ordering Costs

ABC Classification SolutionABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000

105 200 600 120,000

019 2,000 55 110,000

144 20,000 4 80,000

207 7,000 10 70,000

Total 1,316,000

ABC Classification SolutionABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000 71.1 A

105 200 600 120,000 9.1 A

019 2,000 55 110,000 8.4 B

144 20,000 4 80,000 6.1 B

207 7,000 10 70,000 5.3 C

Total 1,316,000 100.0

Deriving an EOQDeriving an EOQ

1.1. Develop an expression for setup or ordering Develop an expression for setup or ordering costscosts

2.2. Develop an expression for holding costDevelop an expression for holding cost

3.3. Set setup cost equal to holding costSet setup cost equal to holding cost

4.4. Solve the resulting equation for the best Solve the resulting equation for the best order quantityorder quantity

Why Holding Costs IncreaseWhy Holding Costs Increase

Purchase OrderDescription Qty.Microwave 1

Order quantity


Order quantity

More units must be stored if more are ordered

Why Order Costs DecreaseWhy Order Costs Decrease





1 Order (Postage $ 0.33) 1000 Orders (Postage $330)

Order quantity


EOQ Model EOQ Model (When To Order)(When To Order)

Reorder Point (ROP)

Time

Inventory LevelAverageInventory

(Q*/2)

Lead Time

Optimal Order

Quantity(Q*)

The Reorder Point (ROP) CurveThe Reorder Point (ROP) Curve

Q*

ROP (Units)

Slope = units/day = d

Lead time = LTime (days)

Inve

ntor

y le

vel (

units

)

Sample Problem 1Sample Problem 1 Assume you have a product with the following Assume you have a product with the following

parameters:parameters: Annual Demand = 360 unitsAnnual Demand = 360 units Holding cost = $1.00 per unitHolding cost = $1.00 per unit Order cost = $100 per orderOrder cost = $100 per order

What is the EOQ for this product? What is the EOQ for this product? AAssuming a ssuming a 300-day work year, how many orders should 300-day work year, how many orders should be processed per year? What is the expected be processed per year? What is the expected time between orders?time between orders?

Problem 2 SolutionProblem 2 Solution

2*Demand*Order Cost 2*360*10072000 268.33 items

Holding cost 1EOQ

Demand 3601.34 orders per year

268N

Q

Working days300 /1.34 224 days between orders

Expected number of ordersT

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Material Productivity By T. A. Khan January 2008