Production Management Sy Bba Sem 1
Production Management Sy Bba Sem 1
Production Management Sy Bba Sem 1
PRODUCTION
MANAGEMENT-I
SY BBA SEM3
DR. SEEMA MALHOTRA
2018
PRODUCTION MANAGEMENT-I
UNIT 1:
INTRODUCTION TO OPERATIONS MANAGEMENT:
(Weightage 20%)
PRODUCTION SYSTEM
The production system is ‘that part of an organisation, which produces products of an
organisation.
It is that activity whereby resources, flowing within a defined system, are combined and
transformed in a controlled manner to add value in accordance with the policies communicated
by management’.
A simplified production system is shown below:
SDJIC Page 2
PRODUCTION MANAGEMENT-I
4. There exists a feedback about the activities, which is essential to control and improve system
performance.
PRODUCTION MANAGEMENT
Production management is ‘a process of planning, organising, directing and controlling the
activities of the production function. It combines and transforms various resources used in the
production subsystem of the organization into value added product in a controlled manner as per
the policies of the organization’.
E.S.Buffa defines production management as follows: ‘Production management deals with
decision-making related to production processes so that the resulting goods or services are
produced according to specifications, in the amount and by the schedule demanded and out of
minimum cost’.
The application of management to the field of production has been the result of three major
reasons:
i) The development of factory system of production.
ii) The development of the large corporation with many owners and the necessity to hire
people to operate business.
iii) The work of many pioneers of scientific management who were able to demonstrate
the value from a performance and profit point of view.
Objectives of Production Management
The objective of the production management is ‘to produce goods and services of Right Quality
and Quantity at the Right time and Right manufacturing cost’.
1. Right Quality: The quality of product is established based upon the customers need. The right
quality is not necessarily being the best quality. It is determined by the cost of the product and
the technical characteristics as suited to the specific requirements.
2. Right Quantity: The manufacturing organisation should produce the products in right
number. If they are produced in excess of demand the capital will block up in the form of
inventory and if the quantity is produced in short of demand, leads to shortage of products.
3. Right Time: Timeliness of delivery is one of the important parameter to judge the
effectiveness of production department. So, the production department has to make the optimal
utilization of input resources to achieve its objective.
SDJIC Page 3
PRODUCTION MANAGEMENT-I
4. Right Manufacturing Cost: Manufacturing costs are established before the product is
actually manufactured. Hence, all attempts should be made to produce the products at pre-
established cost, so as to reduce the variation between actual and the standard (pre-established)
cost.
OPERATIONS SYSTEM
An operation was defined in terms of the mission it serves for the organisation, technology it
employs and the human and managerial processes it involves. Operations in an organisation can
be categorized into Manufacturing Operations and Service Operations. Manufacturing
Operations is a conversion process that includes manufacturing yields a tangible output: a
product, whereas, a conversion process that includes service yields an intangible output: a deed,
a performance, an effort.
Operations system converts inputs in order to provide outputs, which are required by a customer.
It converts physical resources into outputs, the function of which is to satisfy customer wants.
Everett E. Adam & Ronald J. Ebert defines as ‘An operating system is the part of an
organisation that produces the organistion’s physical goods and services’.
Ray Wild defines operations system as ‘a configuration of resources combined for the provision
of goods or services’.
In some of the organisation the product is a physical good (breakfast in hotels) while in others it
is a service (treatment in hospitals). Bus and taxi services, tailors, hospital and builders are the
examples of an operations system.
Joseph G .Monks defines Operations Management as the process whereby resources, flowing
within a defined system, are combined and transformed by a controlled manner to add value in
accordance with policies communicated by management.
Objectives of Operations Management can be categorized into Customer Service and Resource
Utilisation.
Customer Service
The first objective of operating systems is to utilize resources for the satisfaction of customer
wants. Therefore, customer service is a key objective of operations management. The operating
system must provide something to a specification, which can satisfy the customer in terms of
cost and timing. Thus, providing the ‘right thing at a right price at the right time’ can satisfy
primary objective. The aspects of customer service are specification, cost and timing. They are
the principal sources of customer satisfaction and must therefore be the principal dimension of
the customer service objective for operations managers.
Resource Utilisation
Another major objective of operating systems is to utilize resources for the satisfaction of
customer wants effectively. Customer service must be provided with the achievement of
effective operations through efficient use of resources. Inefficient use of resources or inadequate
customer service leads to commercial failure of an operating system.
Operations management is concerned essentially with the utilisation of resources, i.e. obtaining
maximum effect from resources or minimising their loss, under utilisation or waste. The extent
of the utilisation of the resources’ potential might be expressed in terms of the proportion of
available time used or occupied, space utilisation, levels of activity, etc. Each measure indicates
the extent to which the potential or capacity of such resources is utilised. This is referred as the
objective of resource utilisation.
SDJIC Page 4
PRODUCTION MANAGEMENT-I
Operations management is concerned with the achievement of both satisfactory customer service
and resource utilisation. An improvement in one will often give rise to deterioration in the other.
Often both cannot be maximized, and hence a satisfactory performance must be achieved on both
objectives. All the activities of operations management must be tackled with these two objectives
in mind, and because of this conflict, operations managers’ will face many of the problems.
Hence, operations managers must attempt to balance these basic objectives.
SDJIC Page 5
PRODUCTION MANAGEMENT-I
b) Pest management: determining weed, insect, disease, and other threats to crop growth,
yield, and quality and what preventive or remedial actions to take against those pests with
worker safety and environmental impacts.
c) Nutrient management: determining the additional nutrients the soil needs for crop
growth, and applying animal manure, compost, or commercial fertilizer
d) Water management: determining the water needed for crop growth and applying that
water efficiently, considering water availability, drainage, and offsite water
quantity/quality impacts.
SDJIC Page 6
PRODUCTION MANAGEMENT-I
However a clear cut distinction between goods and services is difficult to make.
In reality, Manufacturing firms do not just produce goods and services firms do not just
offer services. All services are a mixture of a service and a tangible good. Also the sale of
many goods includes or requires service for example, automobile sales (tangible product)
has the service components of financing and transportation (intangible product).
Similarly customers expect good food (tangible product) at the hotels along with good
service (intangible).
Even though service providers cannot inventory their outputs, they must inventory the
inputs for their service operations. For example, hospitals must maintain an adequate
supply of medication, appropriate strength of doctors, nurses and supporting staff.
As for customer contact, there are some services, which have little outside customer
contact such as backroom operations of a bank or the baggage handling area at the
airport.
Thus, from the above discussion it is clearly evident that the operations management is relevant
to both manufacturing and service operations.
SDJIC Page 7
PRODUCTION MANAGEMENT-I
of product should have enough functional and artistic value which takes us competitive or
non competitive.
2. Process Selection and Planning: It involves taking decisions about technology,
machines and equipment. Process planning, detailing the stages of the process gives us an
idea of optimum automation and mechanization.
3. Facilities Location: Where we can locate our production or operation? It should be done
on the basis of requirement of production and distribution. It also considers factors like
availability of raw materials, labour, infrastructure facilities (such as electricity, transport,
banking post, insurance, etc), Govt. policies, customers.
4. Facilities Layout and Material Handling: Plant layout deals with the arrangement of
machines and plant facilities in such a way that flow of production remains smooth,
uninterrupted and machines are arranged in a sequence as per requirement of production
process. Machines performing similar task are grouped together. Departments are laid out
in such a way that cost of material handling is reduced by making proper choice of
material handling equipment. Group technology, cellular manufacturing system, flexible
manufacturing system have made concept of layout planning undergo a tremendous
change.
5. Capacity Planning: This deals with procurement of productive resources. Capacity
refers to the level of output of the conversion process over a period of time. Full capacity
indicates maximum level of output. Capacity is planned for long term and short term
depending on the demand forecast and the strategy of the organization for expansion or
diversification. Tools helps in capacity planning are marginal cost, learning curve, linear
programming and decision tree.
B) Operational or Short-term Decisions
1. Production Planning: Planning is pre-operational activity. It aims at setting goals and
allocating the existing resources viz. men, machine, materials and plant services among
various production operations so that best possible outcome can be made in the light of
set goals. It attempts to gain best utilization of resources.
2. Production Control: control is a management technique which aims to see that the
activities are carried on in line with the pre-determined standards. Production control is
considered to have wider scope thus it includes production planning. It involves planning,
routing (to decide route/flow of production activity), dispatching (to issue material and
authorizations for the use of machinery and plant services), follow up (compares actual
production with target) – If deviations found out then they are corrected and reasons are
investigated.
3. Inventory Control: It deals with the control over the raw material, work in progress,
finished products, stores supplies, tools etc. The inventories should be purchased at right
time, of right quality, in right quantity, from right sources and at right price. These five
R’s consideration enables scientific purchases. The raw material, work in progress
finished goods should be maintained properly so that there are no stock outs and also no
accumulation, thereby balancing inventory cost.
4. Quality Control: The long-run success of the business largely depends on its ability to
maintain quality standards as decided by the management and accepted by the customers.
The quality standards are prescribed in terms of specifications like size, colour, tastes,
etc. The raw material, work-in-progress and the finished goods are inspected at various
stages of production. It should be done by various techniques so that quality in terms of
SDJIC Page 8
PRODUCTION MANAGEMENT-I
SDJIC Page 9
PRODUCTION MANAGEMENT-I
SDJIC Page 10
PRODUCTION MANAGEMENT
MANAGEMENT-I
Human resources department provides for the recruitment and selection of the t
production staff
It also helps in Training and development of the employees in production department
It also helps in decisions regarding salary and compensation packages, bonus
incentives, etc.
OPERATIONS MANAGEMENT AND QUALITY ASSURANCE DEPARTMENT: DEPARTMENT
Helps
lps in checking the quality of the raw materials, work
work-in-progress
progress and the finished
product
Identifies the problems through quality control and rectifies them.
Production
Systems
Continuous Intermittent
Production Production
System System
SDJIC Page 11
PRODUCTION MANAGEMENT-I
SDJIC Page 12
PRODUCTION MANAGEMENT-I
SDJIC Page 13
PRODUCTION MANAGEMENT-I
Job and Batch production are the intermittent production systems. Intermittent means something
that starts (initiates) and stops (halts) at irregular intervals. Project production is also an
intermittent production system.
Advantage of Intermittent Production System:
Lesser capital investment.
Higher flexibility in operations.
It is possible to manufacture different products.
Job satisfaction for the workers increases as there is lesser automation.
Stoppage of one department does not affect the other department.
Disadvantages of Intermittent Production System:
Per unit cost of production is relatively higher.
Investment in inventory is relatively higher.
More reliance on labour.
There is problem of planning and control of complex jobs.
Material handling is costly.
SDJIC Page 14
PRODUCTION MANAGEMENT-I
SDJIC Page 15
PRODUCTION MANAGEMENT-I
3. Nature of Inventory
1. Dependent Demand Inventory
It refers to those raw materials whose demand is directly linked with the demand of
finished goods. Example: all the raw materials directly going into the product, all the
primary packaging material used to pack single unit of product are called dependent
demand inventories.
2. Independent Demand Inventory
These are the materials whose demand is not directly linked with the product. For
example oil, lubricants, ball bearings, secondary packaging materials, whose demand
depends on overall scale of manufacturing. If the production volume increases the
demand of such materials will also increase. It is not possible to calculate the exact
quantity of independent demand inventories, while it is possible to do so for
dependent demand inventories. However the required quantity of such independent
demand inventories can be forecasted using various methods.
SDJIC Page 16
PRODUCTION MANAGEMENT-I
Ordering cost varies with the number of orders placed during a given period of
time and can be calculated as follows:
Ordering cost= (cost per order) X (number of orders placed in the given period)
3. Carrying Cost: These costs include the costs connected with storage of the raw
material and the financial costs in form of interest costs on the money invested in
inventory, in land and building to hold inventory and in inventory holding and control
equipments.
Carrying costs are broadly classified into:
a) Interest Costs: These are the financial costs. It is the loss of interest on money
blocked in inventory. It can be considered as the opportunity cost of money
blocked in inventory if it is completely financed through internal resources. If
there is an external borrowing, it is the interest cost incurred on this external
borrowing. With the increase in order quantity, average inventory levels will rise
and this cost will also rise.
b) Storage costs: it is the cost involved with the safe storage of the raw material. It
includes the salary of stores department employees, storage space costs like rent,
depreciation and tax payments of the building, power bills, accounting costs,
depreciation of store set-up, inventory risk costs such as obsolescence of
inventory, physical deterioration of inventory, insurance cost of stock and losses
from pilferage. With the increase in order quantity, average inventory levels will
rise and this cost will also rise.
Carrying cost can be determined by the following formula:
Carrying cost= (cost of carrying one unit of an item in the inventory for a given
length of time, usually one year) X (average number of units carried in the
inventory for the given period)
4. Shortage Costs: This is the cost of not having the raw material in stock which may
lead to costs in form of loss of sales and goodwill and back ordering costs such as
buying at a higher price in emergency, cost of using expensive and faster means of
communication for faster delivery. With an increase in quantity ordered such costs
tend to reduce.
5. Capacity costs: these are incurred in form of overtime payments when capacity is too
small and lay-offs and idle time costs when capacity is too large.
Some of the components of inventory costs are conflicting, if ordering costs are more the
carrying costs are less and vice versa.
Generally, if no shortage is allowed and price is constant, Total inventory cost is
calculated as follows:
TC= Purchase cost + ordering cost + carrying cost
TVC (total variable cost) = ordering cost + carrying cost
SDJIC Page 17
PRODUCTION MANAGEMENT-I
Viewed in this perspective, inventory management is broad in scope and affects a great
number of activities in an organization.
Inventory control, on the other hand, is defined in narrower sense than inventory
management and pertains primarily to the administration of the established policies,
systems and procedures.
6. Concept of selective inventory control & ABC analysis. Advantages & Limitations of
ABC analysis, VED analysis, (Refer to the notes from Aswathapa)
ABC X VED matrix: It’s a combination of ABC and VED analysis, used for
classification, one depending on the consumption value and the other on the criticality of
the item. When we combine both and classify the materials depending both on he
consumption value and the criticality the results are better. We can get a 3X3 matrix
showing nine ways of classification as shown below:
V E D
A AV AE AD
B BV BE BD
C CV CE CD
ABC-VED Matrix
This type of classification helps the management to decide the materials policy. An item
lying in AV cell belongs to both the A and the V class, indicating that it is costlier with
higher annual consumption and also critical, so the management should assure its
availability at the time of need and also the stock levels should be controlled so that
carrying costs are controlled. Similarly if an item belongs to VC category its consumption
value is low but the item is vital for production.
FSN analysis: (Refer to Aswathapa)
Reasons for accumulation of Non-Moving Inventories:
1. When old machines are sold, care is not taken to sell old spare parts. These spare
parts lying in the store become non-moving items.
2. When new material or packing material is introduced without consuming the old
material in full, this forms non-moving inventory.
3. The finished product is suddenly discontinued by the marketing department and thus
the raw material meant for that finished product becomes non-moving inventory.
4. The introduction of a new product is not successful and the product is not accepted by
the consumers, the raw material meant for such products becomes non-moving
inventory.
5. Legal restrictions and norms by the government agencies that restrict or prohibit the
use of certain materials for example plastic bags, lads to accumulation of non-moving
inventory.
Methods to dispose of non-moving inventory:
1. Contact the supplier of that item to return the stock.
2. Find and contact new users of such materials through the existing suppliers and
buyers or through advertising.
3. Find some alternative use of the item and consume it gradually.
4. Sell it to the employees of the organization at subsisided rates.
5. Sell it as scrap.
SDJIC Page 18
PRODUCTION MANAGEMENT-I
6. If the item is such that it cannot be given/sold to anyone due to security reasons it
should be destroyed permanently.
7. The concept of Economic Order Quantity to minimize total cost of Inventory. Formula of
Economic Order Quantity ( EOQ ) for basic model of Economic Order Quantity
(Aswatthapa), Numerical problems of basic EOQ model (class notes)
8. EOQ model with price discounts, Numerical model for EOQ with price discounts (class
notes)
9. EOQ model with separate consideration for storage cost & interest cost.
Need to consider storage cost & interest cost separately: in the basic EOQ model, it was
understood that both the interest and storage costs reduce with the reduction in the stock.
The inventory carrying cost was counted as a sum of interest cost and storage cost, on
average stock level. In practical situations, this consideration, of determining coat on
average stock, is valid for interest cost but not for the storage cost because of the
following reasons:
a) Interest cost arises because certain amount of money gets blocked in inventory. This
blocked amount is dependent on the price per unit and the stock value. Storage cost,
on the other hand, is not dependent on the stock value but on the physical properties
of the material, like weight, length, volume, storage conditions required. For example
if the item is a cold storage item, storage cost will be high irrespective of the value of
the stock or the material can be volume occupying material thus require more space
and hence a higher storage cost again, certain materials are very sensitive and
exposure to air, moisture is not allowed. In such cases the storage costs are higher
even though the material is a low value material.
b) Storage facilities are designed and created to keep the maximum level of inventory
and not for the average level of inventory, at any point of time. If the storage facilities
are created for average level of inventory, it will lead to storage problems at the time
of holding the maximum inventory. But with the reduction in the stock level from the
maximum level, size of the storage facility does not decrease because certain
components of storage expenses do not change. For example, the electricity bill of the
warehouse, salary of the people working in warehouse, depreciation and rent charges
of the warehouse, insurance cover of the warehouse, housekeeping and cleaning costs
at the warehouse.
Due to these reasons, rather than associating the storage cost with the average level of
inventory, we associate it with the maximum level of inventory.
Numerical problems for EOQ model with separate consideration for storage cost &
interest cost (class notes).
10. EOQ model with shortage cost, Numerical problems for EOQ model with shortage
11. The concept of Economic Run Length (ERLQ) when item is supplied at uniform rate
rather than instantaneous supply in one lot. ERL formula derivation, Numerical problems
for ERLQ model
12. The concept of lead time of purchasing. Understanding of Internal & External lead time
13. Concept of various stock levels viz. Re-Order Level (ROL), Safety stock, Buffer stock,
Maximum Level, Minimum Level etc.
14. Composite numerical problems with practical data. Concept of service level and
probabilistic demand. Numerical examples based on these theories.
SDJIC Page 19
PRODUCTION MANAGEMENT-I
Important Questions:
Theory
1. Explain various reasons for accumulation of non-moving inventories. How can we get rid
of these? *****
2. Explain the classification of independent demand inventories and dependent demand
inventories.*
3. What is meant by ABC Analysis?* Write a detailed note on ABC analysis**( advantages
and disadvantages)
4. Define inventory and inventory control***.
5. Give reasons for keeping inventory*.
6. Explain the objectives of inventory control.
7. Name different classifications/analyses to inventory and define any one of them.
8. Explain various costs associated with inventory control****.
9. Explain why interest costs and storage costs require separate treatment in inventory
control and EOQ determination. *
10. Mathematically prove that when order quantity is equal to EOQ, total ordering cost is
equal to total carrying cost.(2015/2011)
11. Explain various assumptions of EOQ model and derive the formula of EOQ from
equation of Total Cost of inventory.**
12. Explain the situation of in-house manufacturing in which inventory supply is non-
instantaneous and at some uniform rate. Derive the formula for Economic Run Length
Quantity for this situation. (2011)
Numerical Questions:
Numerical problems of basic EOQ model
1. Annual demand of a material is 90,000 kg. Unit price of the material is Rs. 40/Kg.,
annual inventory carrying cost is 10% of the price, and cost of placing one order is Rs.
450. Find: a) EOQ b) Number of orders to be placed in a year and c) Total annual cost of
inventory.
2. A factory works for 300 days in a year. Daily requirement of a material is 150 pieces.
While preparing purchase order following expenses are incurred:
a) Cost of sending inquiries Rs. 100
b) Cost of making comparison statement Rs. 50
c) Cost of negotiations Rs. 150
d) Cost of tying an order Rs. 50
e) Cost of sending order by courier Rs. 50
f) Cost of checking newly received material Rs. 200
g) Price of the material Rs 60/piece
h) Cost of carrying inventory is 10% of the price/unit on annual basis.
Find: a) EOQ b) Number of orders to be placed in a year and c) Total annual cost of
inventory.
3. Monthly demand of a material is 1600 litres. Price of the material is Rs. 160/lt. Inventory
carrying costs are 10% of the price on annual basis. Cost of sending inquiry letter is Rs.
200. Cost of making comparison statement is Rs. 200. Cost of arranging negotiation
sessions is Rs. 750. Cost of typing and sending purchase order is Rs. 250. For every order
received, there is a quality check conducted by taking a sample of 5 litres. This quality
check method is destructive testing method. Apart from this, cost of conducting one
SDJIC Page 20
PRODUCTION MANAGEMENT-I
quality check is Rs. 200. Find EOQ, number of orders to be placed in a year and the time
gap between two orders.
4. Annual demand of a material is 25,000 kg. Unit price of the material is Rs. 62.50/Kg.,
annual inventory carrying cost is 10% of the price, and cost of placing one order is Rs.
5000. Find: a) EOQ b) Number of orders to be placed in a year and c) Total annual cost
of inventory.
5. Daily demand of a material is 300 Kg. The factory works for 300 days in a year. Cost of
placing an order is Rs. 4050. This material is available in bags of 20 Kg. The price of a
bag is Rs. 1800. Inventory carrying cost is 10% of price on annual basis. Find EOQ and
number of orders to be placed in a year.
6. Weekly demand of a material is 400 units. The factory works for 49 weeks in a year. Cost
of placing one order is Rs. 2450 and the price of the material is Rs. 80/unit. Inventory
carrying costs are 20% of the price per unit per annum. Find: EOQ, number of orders to
be placed in a year and the time gap between two orders.
7. The ABC Ltd. company purchases 80,000 shipping containers per year. Price of each
container is Rs. 0.4. Cost of purchase is Rs. 80 per order. Cost of holding one container
per year is Rs. 0.10. Bank rate of interest is 15% including charges for taxes and
insurance. Find: i) EOQ; ii) time between orders depending on 220 working days per
year; iii) minimum variable cost per year and iv) if the company follows a policy of
quarterly ordering, what will be the increase in variable cost.
8. A company requires 10,000 units of a certain raw material per annum. The cost per order
is estimated at Rs. 50. The storage cost is estimated at Rs. 5 per unit of average inventory.
What quantity should be ordered so that the total cost is the minimum? Also find the
minimum total cost if Rs 2 per unit.
9. The annual demand of a chemical is 40,000 units. Cost of placing one order is Rs. 800.
Price of the chemical is Rs. 10 per unit. Inventory carrying cost is 10% of the price. Find
EOQ and minimum total cost.
10. Annual demand of a product is 80,000 pieces. The factories ordering cost is Rs. 1000 per
order. The price is Rs. 10 per piece. Inventory carrying cost is 10% of price. Find EOQ
and minimum total cost.
11. Weekly demand of one material is 900 pieces. Cost of placing one order is Rs. 1664 per
order. The company is working with EOQ of 4160 pieces. Per unit per year inventory
carrying cost is to be counted at the rate of 20% of price. Find out per piece price to
justify this EOQ value. (2015)
12. Daily demand of one chemical is 730 pieces. The cost of placing one order is Rs. 1250
per order. The maximum level fixed for this material is 10950 pieces. The company
prefers to work with 20% of EOQ as safety stock. Price of the material is Rs. 40 per
piece. What shall be inventory carrying cost as % of price per unit, per year basis? (2015)
13. Annual demand of a material is 4050 kgs. Cost of placing one order is Rs. 2500. Price of
this material is Rs. 20 per kg. If the EOQ is 3000 Kgs, what should be the annual per unit
inventory carrying cost in terms of % of price? (2013)
14. Weekly demand of one material is 1000 pieces. Ordering cost is Rs. 520 per order, price
of material is Rs. 480 per box of dozen. Per unit annualized inventory carrying cost is
10% of price. Find EOQ. (2011)
SDJIC Page 21
PRODUCTION MANAGEMENT-I
15. Demand of a chemical is 1600 kg/week. There are 50 working weeks in one year;
inventory carrying cost is Rs. 8/kg/year. Ordering cost is Rs. 800/order. Find out number
of orders to be placed in a year if EOQ is ordered. (2010)
16. Demand of one material is 300kg/day. Factory works for 300 days in a year. Cost of
placing one order is Rs. 2450 per order. Price of this material is Rs. 3200 per bag of 20
kgs. Inventory carrying cost is 10% of price on annualized basis. Find EOQ. (2010)
17. Demand of a material is 800 pieces per week. There are total 50 working weeks in a year.
Inventory carrying cost is Rs. 4 per pc per year. Cost of placing one order is Rs. 1800.
Find EOQ. Company has decided to keep safety stock equal to 10% of EOQ. Since it is
an imported item, purchase Lead time is 10 weeks. Find Re-order level.
18. A factory uses 24000 units of a raw material annually. Price of the raw material is Rs.
1.25 per unit. Cost of placing an order is Rs 25 per order and inventory carrying cost is
6% per year. Find EOQ. If the factory works for 320 days in a year, procurement lead
time is 10 days and safety stock should be of 6 days consumption; find safety stock,
minimum level, and maximum level and re-order level of inventory.
SDJIC Page 22
PRODUCTION MANAGEMENT-I
equal to 10,00,000 pieces; ii) Rs. 0.75 per unit if order quantity is more than or equal to
20,00,000 units. Should any of the offers be accepted? Justify your answer.
26. For a given item there is a constant demand of 60,000 units per annum. The price of the
material is Rs. 60 per unit, ordering cost is estimated at Rs. 600 per order and inventory
carrying cost is 30% per annum per unit price. The shelf life of the material is 3 months.
What should be the Total cost at optimal quantity level? If 2000 units are purchased at a
time, a discount of 5% on unit price is offered by the supplier. Should the offer be
accepted? Give reasons for your answer.
27. Weekly demand of a material is 1000 litres. Cost of placing an order is Rs. 1040. Price is
Rs. 50/litre and carrying cost are 32 % of price per unit per year. Find EOQ. Should we
accept 5% discount offer of supplier with the condition that the order quantity shall be
equal to 25 week’s requirement.
28. Annual demand a product is 600 litres per day. There are 300 working days in a year.
Price of the product is Rs. 100/litre. Carrying cost is 32% of price on annual basis.
Ordering cost is Rs. 2200/order. From quality control point of view, this material is
critical. Due to this reason, from every order received 2 litres are used for quality check.
Apart from this Rs. 100 is spent on every quality control test. Find: i) EOQ ii) supplier is
offering following two discounts: a) if quantity is greater than or equal to 20,000 litres,
discount of 4% and b) if quantity is greater than or equal to 30,000 litres, discount of 6%.
Should the discount be accepted; if yes which offer?
29. Daily requirement of a material is 1200 pieces. Price is Rs. 160/ unit. Carrying cost is
25% of the price on annual basis. The factory works for 300 days in a year. Cost of
sending enquiries is Rs. 120. Cost of making comparison statements is Rs. 180. Cost of
arranging negotiations is Rs. 400. Cost of typing and sending order is Rs. 100. Of every
order received, 5 pieces are taken for quality check. This quality check method is
destructive method. Cost of conducting quality test is Rs. 200. Find EOQ. The supplier
offers 5% discount if order quantity is more than or equal to 66,000 pieces. He further
offers additional 2% discount if order quantity is more than or equal to 1, 50,000. Should
we accept this discount?
30. Annual requirement of one chemical is 60,000 kgs; cost of placing one order is Rs. 5,000
per order. Out of every order received, total 5 kgs are used for quality checking. Quality
checking is done by destructive testing. Unit price of this material is Rs. 120 per kg.
Inventory carrying cost is 30% of price on annualized basis. Cost of performing one
quality check is Rs. 1900 per test. This cost of checking, does not include cost of material
used in QC. Find EOQ. If the supplier offers 5% discount for order quantity of more than
or equal to 15,000 kg, should we accept this discount offer? (2010)
31. Annual demand of one material is 1, 60,000 Kgs per year. Price of this material is Rs. 40
per Kg. This material is a cold storage item and hence annual per unit inventory carrying
cost is 40% of the price. Cost of sending enquiries while placing purchase order is Rs. 50.
Cost of making comparison statement is Rs. 50. Cost of arranging negotiation session is
Rs. 200. Cost of typing and sending one order is Rs. 100. Out of every order received, 5
Kgs are consumed in quality checking which is done by destructive testing method. Cost
of conducting the quality test is Rs. 200. This cost does not include value of 5 kgs used in
the test. Find EOQ.
The supplier offers 5% discount if order quantity is more than or equal to 16,000 kgs. He
offers total 7% discount if order quantity is more than or equal to 40,000Kgs. Should we
SDJIC Page 23
PRODUCTION MANAGEMENT-I
accept the discount offer? Which offer is better? Justify your answer with proper
calculations. (2011)
32. Annual demand of one material is 90,000pieces per year. There are 300 working days in
a year. Cost of placing one order is Rs. 3200 per order. Inventory carrying cost is Rs. 9
per piece per year. Find out EOQ. The company keeps a safety stock equal to 10% of
EOQ. Purchasing lead time is 10 days. find out maximum inventory level, re-order level
and total annual cost associated with EOQ. If because of storage limitations, maximum
level can be only 6,000 pieces, find out what will be increase in cost of inventory because
of storage limitations? (2011)
33. Daily demand of a material is 400 pieces per day. Price of this material is Rs. 40 per
piece. As this material is a cold storage item, inventory carrying cost is higher at 40% of
price on per unit, per year basis. Company works with 10% EOQ as the safety stock. Cost
of placing one order is Rs. 2920 per order. Find EOQ. The supplier offers 5% discount if
only 5 orders are placed in a year. Should we accept this discount offer or should we keep
on ordering EOQ? Justify your answers with proper calculations. (2015)
Numerical problems for ERLQ model
1. Weekly demand of one chemical is 1872 kgs. This material is manufactured on in-house
basis. The annual capacity of in-house unit is 194688kgs per year. The in-house
manufacturing cost of this material is Rs. 80 per kg. Inventory carrying cost is to be
counted @ 20% of per unit in-house manufacturing cost. Every time the new
manufacturing cycle begins in the in-house unit following expenses are incurred:
Rs. 400 on giving orders and instructions to staff
Rs. 2800 on machine cleaning and tuning
Rs. 400 on generation of records of the new batch.
Find out ELQ, Maximum level, time gap between beginning of two successive cycles and
the total minimum cost of inventory associated with ELQ. (2015)
2. Annual consumption of a material is 80,000 kgs per year. The factory works for 320 days
in a year. This material is manufactured on in-house basis. The capacity of in-house
manufacturing is 375 kgs per day. Every time when new manufacturing cycle begins in
that in-house unit, Rs. 400 are spent on generation of production records and Rs. 400 on
giving orders & instructions. Machine cleaning & resetting cost is Rs. 1900. Per unit in-
house cost of manufacturing is Rs. 80 per Kg. Annual per unit inventory carrying cost is
20% of per unit in-house manufacturing cost. (2013)
a) Find out the Economic Run Length Quantity
b) Find out maximum inventory level
c) Find out length of one production run in days
d) Find out time gap between end of one cycle and beginning of the next cycle
e) Find out time gap between beginning of two successive production cycles.
3. Requirement of one chemical is 300 Kgs daily. There are 300 working days in a year.
This material is manufactured on in-house basis. The capacity of in-house manufacturing
is 600 kg per day. Every time when new manufacturing cycle begins in that in-house unit,
Rs. 500 is spent on generation of production records and Rs. 600 on giving orders &
instructions. Machine cleaning & resetting cost is Rs. 2900. Per unit in-house cost of
manufacturing is Rs. 100 per Kg. Annual per unit inventory carrying cost is 10% of per
unit in-house manufacturing cost. (2010)
f) Find out the Economic Run Length Quantity
SDJIC Page 24
PRODUCTION MANAGEMENT-I
SDJIC Page 25