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Unit 2

Management of Conversion System


Chapter 11: Resource Planning
Lesson 34- Tutorial 10

Good Morning students, today we are going to have a tutorial session for the
previous lesson. The overall objective is to appreciate how the theoretical concepts
are translated and applied into practical business situations. We would start with a
few problems to review our conceptual understanding and wind up the session with
a well-designed case study.
I hope the session results into value addition for all of us.
Let’s put our thinking caps and start now.

1. The demand that drives the production of automobiles is affected by the condition
of the economy; therefore, it is considered dependent demand
a. TRUE
b. FALSE
2. Statistical forecasting is the primary tool for the determination of dependent
demand.
a. TRUE
b. FALSE
3. A component is an item that may go through one or more operations to be
transformed into or become part of one or more parents.
a. TRUE
b. FALSE
4. Any good manufactured from one or more components is called a parent.
a. TRUE
b. FALSE
5. A recognition award is assembled from a wood plaque, a stiff paper certificate, a
Plexiglas sheet, and four decorative screws. The Plexiglas sheet is an example of
a parent.

a. TRUE
b. FALSE
6. A component, always, may be categorized by dependent demand.

c. TRUE
d. FALSE

7. Material requirements planning (MRP) is a computerized information system that


was developed specifically to help companies manage dependent demand
inventory and schedule replenishment orders.

e. TRUE
f. FALSE
8. A bill of materials database and the master production schedule are the minimum
essential inputs for effective use of an MRP system.

g. TRUE
h. FALSE

9. The bill of materials is a document used to compare price data from competitive
suppliers.

i. TRUE
j. FALSE
10. End items, intermediate items, and subassemblies, may be classified as both a
parent and component items in inventory.

TRUE
FALSE

11. An MRP explosion is an engineering diagram that shows each element of a sub-
assembly, component, or end item.

TRUE
FALSE

12 A desirable competitive strategy is achieved when a component has multiple


parents.

TRUE
FALSE

13 Action notices are electronic messages that automatically initiate an action such
as releasing new orders.

TRUE
FALSE
14 Capacity requirements planning (CRP) is an essential bridge between the material
equirements plan and the plant's production capacity.

TRUE
FALSE

15 Manufacturing resource planning (MRP II) is a system that ties the firm's MRP
with the up line suppliers' systems to promote supply chain management.

TRUE
FALSE

16 Which of the following items represents independent demand?

a. sliced pickles
b. hub caps
c. Houses
d. Lavatory
17 Which of the following is not a benefit of an MRP system?
a. reduce inventory levels
b. utilize labor and facilities better
c. improve customer service
d. forecast finished goods demand
18 Which of the following is an example of dependent demand for manufactured
goods?

a. Pick-up truck
b. Refrigerators
c. hotel rooms sold
d. hospital bed sheets
19 The total demand for a component item is derived from:
a. the calculation of demand based of the demand of the parent item.
b. the statistical forecast of the component demand.
c. both a and b
d. none of the above
20 An MRP system provides which of the following advantages?
a. automatic update of the dependent demand and replenishment
schedules of components when parent schedules change.
b. statistical forecast of component demand
c. smoothing of lumpy demand
d. none of the above

21 The key inputs to an MRP include:


a. engineering drawing of the product
b. process chart
c. inventory record database
d. both a and b

22 An item that is assembled from two or more components and is also categorized
as WIP is described as a(n) _________________.

a. end item
b. intermediate item
c. Subassembly
d. purchased item

23 A component that has one or more parents and no components is most likely to be
a(n) ________________.

a. end item
b. intermediate item
c. Subassembly
d. Purchased item
24 Which of the following is NOT an inventory transaction?

a. Scheduled receipts
b. Canceled orders
c. Verifying scrap losses
d. Storage space limitations

25 In a facility using a make-to-order strategy, the planning lead-time factor with the
greatest variability is _________________.
a. Setup time
b. Process time
c. Materials handling time between operations
d. Waiting time

26 The listed lot sizing method that best minimizes the inventory levels is:
a. Economic Order Quantity
b. Periodic Order Quantity
c. Lot for Lot
d. Not enough information given

27. Which of the following statements are true about action notices?

a. They automatically trigger electronic release of orders


b. They are issued when there is a nonzero quantity in the action
bucket.
c. They are generated each time the MRP system is updated.
d. both b and c
28. Which statement about capacity requirements planning (CRP) is NOT true?
a. CRP systems adjust the order release time to prevent a workstation
from exceeding its capacity.
b. CRP systems access inventory records to determine when planned
orders or scheduled receipts will reach a workstation.
c. CRP systems enable the identification of "critical" workstations.
d. he purpose of CRP is to match THE material requirements plan with
the plant's production capacity.
29. In service resource planning, demand for core services may be forecast while
dependent demand is derived for which of the following service elements.
a. supporting materials
b. Staff
c. Equipment
d. all of the above
30 An end item "A" is assembled from two (2) "B" components and two (2) "C"
subassemblies. The "C" subassembly is composed of one of each components "B"
and "D." If the gross requirement for "A" is 100 units, what is the demand for
component "B"?
a. 100
b. 200
c. 400
d. 800

Case

MAGI CORPORATION

MAGI Corporation deals in maintenance of agricultural tractors as well as


in the supply of tractor spare parts. MAGI’S spare parts division has its central
store at Bangalore and eight branches in different districts of Karnataka state.
THE division deals in spares for different makers of tractors and implements. It
maintains inventories of spare parts, both for indigenous and imported models.
These models of tractors include Zetors, Utos, Byclarus, Ursus and Russian,
which are imported, and MASSEY FERGUSON, ESCORT and
INTERNATIONAL HARVESTER, which are indigenous. Spares for the imported
tractors are also imported. The total number of spare part items is around
7000 and only about one –sixth of these are available from Indian suppliers.

The purchase of spare parts is made centrally and distributed to the


branches. However, sales are made both at the central store and the branches.
The operating system of the division is shown schematically.

During the year APRIL 1990- MARCH 1991, the division made sales of
RS 53.9 LAKHS, OUT OF which two thirds was from the central stores and
the remaining from the branches. The four branches at HUBLI, DAVANGERE,
BIJAPUR, and GANGAVATHI took a lion’s share of branch sales. The sales
from other four branches were around rupees five lakhs. From the inventory
valuation it is seen that as on march 31, 1990 the central store had an
inventory worth RS 46.82 lakhs. The inventory in the four major branches was
RS 12.35 LAKHS. The total stocks of spares the entire division held was
worth RS 59.17 LAKHS.

IN 1990, MAGI corporation was diversifying its field of business and a


section dealing. In veterinary drugs was started in the central stores complex
towards the end of that
Year.

JAYADEV, who took over as manager of the spare parts division in


1991, was of the Opinion that considering the scale of transactions, the division
was carrying far too high an inventory. This was mainly because old and rule
thumb methods of stock control were being followed and there was urgent
need of introducing modern Scientific methods of inventory control for
reducing stocking costs. He felt that good techniques of forecasting the
demand of spares have also to be Installed to promote more effective service
to the agricultural tractor users. He also felt that the best control of the system
could be obtained through computerization, as the number of items were fast
increasing and the market was rapidly expanding.

Prior to Jayadev’s taking over of the division, a preliminary study was


instituted by the organization, to determine the feasibility of computerizing its
operations. The study gave an overview of the systems, and also the relevant
costs that would be incurred in case Magi decided to computerize its spare parts
division’s operations. The expenses estimated, were a one time charge of Rs.
28,000, quarterly charges of Rs. 10,000, monthly charges of Rs. 5140 and
annual charges of Rs. 2400. These include costs of data preparation, data entry
into floppy disks and stationery. The information obtained from the system
included stock positions (both at the central stores and at the branches),
shortage lists and usage lists.
Figure OPERATING SYSTEM OF MAGI

Indian
Other state SYSTEM Branch 1
Branch 32
EXISTING Customer
Foreign
suppli
suppliers
agros ers Central
Customer
Cus tomer state
Other
The present organization of the central stores is shown in fig. 6.2. At each Customer
agros
of the branches there is one stores
sales assistant and one helper. In some branches,
where transactions are more, the number of helpers will be two, the sales
assistant’s job is similar to that of the one in the central stores.

The paper work flow is as follows. Whenever there is a shortage of an


item, the store keeper makes out an indent and passes it on to the purchase
section, which prepares five copies of the purchase order. After the signature of
the manager, they are distributed as shown in the diagram. When the material
against the purchase order is received by the stores, three copies of the stock
receipt note are prepared. One copy is used for the ledger entry in the store
accounting section, one for payment and the third for the records of the store
keeper.

The transaction between the central store and the branch stores is
controlled through a stock transfer note (STN), which is prepared in
quadruplicate every time a transaction is made. Two copies are sent to the
branch along with the spares, one is used for ledger entry and the other as
authority for stock move. Whenever a sale is made in the counter, a cash bill is
prepared. Four copies of the bill are prepared by the sales assistant. The last
copy is left in the cash book itself. The remaining three copies are first sent to the
accounts. On the payment of cash by the customer, a seal indicating that the
cash has been received, is put on all three copies and one is filed there.
Subsequently, this is passed on to the stories accounting section for ledger entry.
The remaining two copies are passed on to the store keeper who puts the seal
indicating that the item has been delivered, and files one copy. This is used in the
bin card entry. The original copy of the cash bill is given to the customer along
with the store item.

Present organization chart of Magi.

Manager

Purchase & sales engineer


(Development, imports and sales analysis)

Stores assistant Purchase assistant


(Spares) (Iron and steel hand tools &
miscellaneous)

Sales counter Outward Store keeper Stores


section accountant

Whenever there is a bulk sale, the cash bill is replaced by an ‘invoice’ or


‘debit note’. When the bulk sale is to the Government state units, a ‘debit note’ is
used. Otherwise ‘invoice’ is used. The flow of information is exactly like that in
the case of cash bills.

When the bulk sale is to an outside private party, a “delivery note” is made
in five copies. The original together with the invoice copy, is sent to the customer
along with the material which is sent in a commercial transport. This enables the
customer to make payment through a bank. The second copy along with invoice
copy is filed in the office file and the remaining three copies are left in the book
itself.
The branches also send in information every week in the form of copies of
cash bills, tally sheet and a copy of the bank deposit note. At the branches, at the
end of each day the money received from sales is deposited at the bank. The
copy of the bank deposit note gives the amount deposited. This, along with the
copies of cash bills are used for the purpose of cross checking. To make this
checking easier a ‘tally sheet’ is prepared, in which the date, cash bill number,
and amount of each bill with details of sales tax, octroi etc. are given. Only the
cash bill can give the details regarding the part number and quantity sold each
day. Here again, four copies of the cash bill are prepared – the original is given to
the customer, the first and the third copies are filed there and the second copy is
sent to the central stores.

INVENTORY CONTROL PROCEDRES


The organization keeps stores ledgers and bin cards at the central stores.
The store keepers, while issuing materials, enter the quantity issued in the bin
cards and, so, the day to day status if inventory is known from these bin cards.
Copies of documents like cash bills, stock transfer notes etc. are used by the
stores accounting group for the documentation in the ledgers.
The bin cards are used to initiate purchase. As soon as the stock of an item
reaches a certain level, the stores attender intimates the stores assistant for
necessary action. This level is fixed based on the experience and subjective
judgment of the store keeper. It is not the practice in the division to prescribe
safety stocks for the items. Further, there is generally a time lag between the
physical transaction and the entries in the stores accounting ledger. Hence, bin
cards are generally more reliable in giving the day to day stock levels of items.

After a few months of taking over charge of division, Jayadev called in a


consultant, Mohan, who was an engineer with an MB and entrusted him with the
following tasks.

1. To suggest inventory control procedures to bring down the inventory


costs.

2. To streamline the procedures and to suggest whether it was feasible to


computerize the information system and if so, to provide an outline of
the system so that it could be taken up with the top management for
installation.

Mohan studied the operations of the spare parts division, held discussions
with the manager, sales engineer, accountant and store keepers. He divided
his recommendations into three areas, i.e., procedural improvements,
inventory control, and forecasting and computerization. In his opinion, the
amount of work, taking into consideration the expanding business, was more
than could be well managed by the existing strength of personnel. For stricter
control of operations to be accomplished, some reorganization was
recommended. The proposed organization structure is shown in fig. 6.3.
However, he felt that a sales engineer and another in-charge of stores are
required for better control.
Proposed organization chart

Manager

Purchase engineer Sales engineer


(Development & imports)

1. Depot inspection
2. Booking dealers in and out of
state
3. Visit to other agros etc.
4. New lines of business

Stores Purchase assistant Purchase assistant Purchase assistant


Assistant (Spares purchases spares (Iron & steel) (Hand tools &
miscellaneous)
Receiving & pricing)

Store Store accountant Sales counter


Outward
Keeping section

Introduction of stores assistant could bring in good control of physical


inventories and the purchase assistant could concentrate more on
purchasing, pricing etc.
Analysis of the paper work revealed that some of the clerical work could be
reduced. For example, of the two copies of the purchase order sent to the
vendor, one is to be used by him for acknowledgement. But in practice this
did not seem to be happening and hence, in effect, an extra copy of the
purchase order needed to be sent. For the acknowledgment, a small slip
could be sent along with the purchase order which could serve as an aid in
knowing the expected lead time. The slip should contain the vendor’s name,
purchase order number and date and a provision for the vendor to fill in the
expected date of supply.
In the case of the delivery note, five copies were prepared. But the
organization itself felt that only four were needed. Hence, subsequently only
four copies were recommended to be prepared.
As indicated earlier, tally sheets were prepared at the branches. the
management felt that, sales assistants at the branches should not be taxed to
do any clerical work which would interrupt his interest in sales expect perhaps
for bill preparation. Hence the preparation of the tally sheet could be
abolished. Moreover, the cross check regarding the amount deposited and
amount sold could be done by making use of the cash bill copies and a copy
of the bank deposit note.
At the branches, four copies of cash bills were prepared; but in practice
only three of these were used. Hence, one copy could be abolished. So,
separate ‘cash bill books’ were recommended to be prepared for the use at
the branches. when three copies were prepared, the original had to be given
to the central stores and the last on could be used for the ledger entries at the
branches. since the first carbon copy was going to the stores, it would be
clear enough for further use at the central stores. For example, if the central
stores wanted to know about the sale of a particular item, its price as charged
by the branches, and the total amount, all these could be obtained from the
cash bill copies.
For inventory control, a system which works on scientific principles, was
recommended to be introduced. This system was to have re-order levels,
maximum stock – which were found out on the basis of demand and supply
patterns of the items. Moreover, strictor control could be achieved by
concentrating only on a few items which might be the A and B class items
according to a suitable classification.
For total material planning some forecasting techniques based on the
‘seasonality index’ or on the increase in the number of tractors per year or on
both could be made use of.
To develop selectiv4e inventory control, Mohan made a list of all items
categorized as general items. He also determined their annual demand and
unit costs for the year 1972-73, and using this he made the classification as
shown in Table 6.1.

Distribution of percentage number of items and percentage value of consumption


Group Consumption Number Total value Percent No. Percent value
number value range (Rs) of items of consump- of items of consump-
-tion -tion

1. 0 to 2000 456 144,154.03 80 9


2. 2001 to 10000 85 373,363.24 15 22.5
3. above 10000 28 1,136,574.39 5 68.5

The number of items included as general items was 569. The total
consumption value was Rs. 1,654,091.67. Out of this, the top 28 items accounted
for the total consumption value of Rs. 1,136,574.40. The next 85 items
accounted for Rs. 373,363.24. Hence totally 113 items accounted for Rs.
1,509,937.64. The remaining 456 items accounted for the consumption value of
Rs. 144,154.03. Table 6.1 indicated different classifications and the value ranges
for classification.
Mohan suggested a fixed interval recorder system for the A and B
items giving the following reason – “fixed quantity recorded system is
cumbersome and expensive, since the size of the order is predetermined, it does
not allow for absorbing variations in usage and this has to be taken care of by
safety stocks. On the other hand, in the fixed interval system, review is less
expensive, periodic and the order quantity can be adjusted to absorb the
variation in storage.” He further stated that the difference in the systems for A
and B items would be the length of review period. He showed, as an example for
an item, the following calculation:

Nozzle- B item-Lead time for procurement = 2 months


Review period length = 2 months
EOQ = 50 units
Annual usage = 270 units
Maximum demand during lead time = 175 units
Safety stock = 175 units

T/2, the average usage during lead time = Vd/2 = 270/12 X 2/2 = 25;
Max level = 175 + 50 – 25 =200.

Hence when review is done, if the available inventory is less than 175, place an
order an order to bring it to level of 200 (taking into consideration both inventory
on hand and on order).

For C items, a two-bin policy was suggested. The amount of stock in


the second bin being a little more than demand during lead time. In order that
purchase planning and stock planning could be done systematically, Mohan
suggested the use of demand forecasting for all items. However, since the
division was a trading organization he felt that the methods should be so selected
as to help in budgeting the annual requirements rather than going in for
sophisticated forecasting methods. He suggested two approaches, one based on
the number of tractors covered by Magi, and the second based on the seasonal
variation of sales.
Since the sale of spares depended upon the number of tractors in the
state, a knowledge of previous sales and of the increase in the number of
tractors would be helpful in projecting the future sales. Detailed information could
be obtained if this analysis was done classwise (either A class items or B class
items, or for any other classification of components). The reasoning behind this
was simple. If there was an increase of X percent in A and Y percent in B class of
items for an increase in N tractors (in number)during the previous year, an
increase of M tractors in the current year would end up in a sale of (X x M/N)
percent of A class (Y x M/N) percent of B class items. Mohan however said that
this was a rough estimation, but in total this would be quite helpful for budgeting
purpose and financial control.
The other method suggested by the consultant was because the sales of spare
parts depended upon the time in which overhauling of tractors was done. This in
turn largely depended upon the monsoon. As there were many vagaries in the
monsoon season, the sales would not only vary from month to month in the same
year but also over the years for the same month. Hence, a tool which takes care
of the seasonal variation in demand would be highly useful. It was also noticed
from the records that the post-monsoon months were the peak sales periods.
Mohan collected the sales data for the years 1989 and 1990 for a few items and
developed figures similar to the ones shown in Table 6.2 and computed the
forecast for the months of June, July and August for 1991, using the sales history
of March, April and May. To account for the trend factor as well the random
factor, an average of the deseasonalized demand was taken. This was
considered the forecasting base. In a similar manner could be forecast and
inventory planning could be done for any period (Table 6.3 and 6.4).

Seasonal variation of demand during 1989-1990 (6.2)

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.
1989 69 71 76 81 85 91 101 97 84 56 51 46
1990 70 70 80 80 90 90 100 100 90 60 0 50
Index 1.4 1.4 1.6 1.6 1.8 1.8 2 2 1.8 1.2 1.0
1.0

De-seaonalized Demand(1991) (6.3)

Month Observed demand Seasonal factor


Deseasonalized
(units) demand
(units)

March 1991 82 1.6 82/1.6=51.2


April 1991 84 1.6 84/1.6=52.5
May 1991 96 1.8 96/1.8=53.3

Demand forecast Quantities

Month BaseX seasonal factor Forecast


June 1991 52.3 X 1.8 94
July 1991 52.3 X 2 104
Aug. 1991 52.3 X 2 104
FEASIBILITY OF COMPUTRIZATION

As a next step, Mohan collected all pertinent information of the


operation of the operations in order to determine the feasibility of
computerization and succinctly put them in a condensed from in Table 6.5

Date form Information Final statement control


Required received generated facili

Delivery note stock Quantity transferred Present stock level Check on transfer
Transfer for note based on opening stock of items-inter
Warehouse or
ware-
House or vice-
versa.

Cash bills branches Quantity sold price Check on price


and
Income

Stock receipt note Incoming quantity Stock positions, Review of


positions
Provided
opening stock-outs

Cash bill central stores Quantity sold Order


decisions

Expected
order.
Material
control and
Planning

Purchase order Expected quantity Available inventory Budgetory


control and
Acknowledgement and lead time in future planning.

Nearly 1000 to 1200 cash bills were received per month from central stores and branches.
On an average there were 200 items in transaction everyday. Thirty purchase orders, 30
stores receipt notes and 60 STNS were prepared every month and each STN had five to
six items detailed in it. Mohan was of the opinion that since the transactions were mostly
routine, much of the manual work could be replaced by the data processing and
increasing the number of employees could be avoided. He made a system flow chart
showing various input and outputs (fig. 6.4)
Magi

Five runs were envisaged:


Run-1: From the purchase order data, the purchase order output, is produced.
Run-2: Using the transaction tape and master tape [master tape is the store ledger]
store ledger for the period showing the transactions is obtained and the
inventory status of each item at the central stores and branches is obtained.
Run-3: The updated master tape is used to generate a storage list and re-order list after
comparing the status of inventory with re-order levels. This with the output of
run-1 will enable order placing.
Run-4: Gives the usage list making the transaction tape. The forecasting techniques
can be used here for future stock planning.
Run-5: Gives the financial details using cash bills (as cards). This output gives details
about profit, sales proceeds etc.
After the study was concluded, Mohan presented his findings and recommendations to
the staff
of the spare parts division of Magi corporation. Sales engineer, Shanmugam, raised
objections regarding the inventory control of A and B items. He said that there were far
too many items involved in the calculation of order quantities and if items other than
general items were included the task would become too difficulty. A few storekeepers
raised a point that since there ere many items which were imported and the lead times
were long for procurement, the suggested periodic review system would not work
satisfactorily and Dev expressed his opinion saying that while a commendable job has
been done regarding the procedures, control and computerization he wished one could get
a little bit more from the angle of policies. The accountant, however, opined that if
computerization was finally decided by management, as no reduction in staff was
suggested, it would add to the cost. Mohan replied that when the system stabilized it
could prove, with increased business, that saving in the inventory cost would outweigh
the computerization costs.
Check list run
Financials
details cash
bills

Stores ledger

Fif!. 6.4 Svstem flow rh"rt


Financial report

QUESTIONS
1. How do you evaluate the recommendation of Mohan in respect of
inventory control of A and B items? Do you agree with his views? If not
why? Has overlooked any vital aspect of inventory management?
2. Should he have taken into consideration that Magi also undertakes
maintenance jobs of tractors? Does such a consideration alter the
management of spare parts?
3. Do you agree with the view of manager Dev regarding policies? If you
were asked to suggest policy measures what would you do? How would
you use the information available?
4. Comment on the computerization scheme proposed. If instead of a
punched card system a desk top system were used, how could you handle
the computerization? Support your answer with system flow charts.

MRP)
Dear students, with this I would like to conclude the today’s tutorial. I hope it has
been a great learning process for all of you and that this exercise has resulted in
immense value addition.
O.K. Then. See you all in the next lecture.
Take care.
Bye.