CHAPTER 7 PRE FINALS

INVENTORY
INVENTORY MANAGEMENT – Is built on two frequently made decisions:
 When to order
 How much to order
OBJECTIVE OF INVENTORY MANAGEMENT;
 Strike the best balance between inventory investment and customer
service.
FUNCTIONS OF INVENTORY
- To provide a selection of goods for anticipated customer demand and to
protect the firm from fluctuations in that demand
- To decouple various parts of the production process
- To take advantage of quantity discounts for inputs of production
- To hedge against inflation and upward price changes, which increase the
cost of inputs and labor.
TYPES OF INVENTORY
(1) RAW MATERIALS
Materials, usually purchased, that have yet to enter to the manufacturing
process.
(2) WORK IN PROCESS INVENTORY
Products or components that are no longer raw materials, but which have
yet to become finished products.
(3) MROs
Maintenance, repair, and opening materials
(4) FINISHED GOODS INVENTORY
End items or products ready to be sold.
COST ASSOCIATED WITH MANAGING INVENTORY:
(1) HOLDING COSTS
The costs of holding or “carrying” inventory over time.
(2) ORDERING COSTS
 The costs of placing an order and receiving goods.
(3) SETUP COSTS
Cost to prepare a machine or process for manufacturing and order, which,
may correlate significantly with setup time.
TO MANAGE INVENTORY, BUSINESS LEADERS MUST RECOGNIZE TWO TYPES OF
DEMAND FOR INVENTORY:
(1) INDEPENDENT DEMAND
The demand for the item is independent of the demand for any other item
in inventory.
(Demand for finished products)
(2) DEPENDENT DEMAND
The demand for the item depends on the demand for some other item on
the inventory
(Demand for components, parts, and raw materials {the imputes of
production}
INVENTORY TURNOVER (OR INVENTORY TURNS)
- A key metric in inventory management
- A number of times that the inventory management, which translates to a
time period, usually a year.
“More turns equals better inventory management, which translates to a
high rate of throughout and conversion to sales (cash) for business.”
“Companies that are managed well, especially those whose leaders have
implemented TPS and lea, typically exhibit high inventory turnover.
FIXED QUANTITY AND FIXED PERIOD INVENTORY CONTORL MODES
- FIXED QUANTITY (Q) SYSTEM
An ordering system in which the same amount Q is ordered each time
whenever the inventory level falls below the reorder point (ROP).
“Require a perpetual inventory system in which records are updated every
time an item is added or withdrawn from inventory.
- FIXED PERIOD (P) SYSTEM
A system in which inventory orders are made at regular time intervals (P).
 “Inventory is ordered at the end of a given period (SUCH AS A SHIFT DAY,
WEEK OR MONTH. Then and only then is on hand inventory counted.
“Only the amount necessary to bring total inventory up to a prescribed
target level (T) is ordered.
“The shorter the period, the higher the inventory turns.
“In JIT or TPS/Lean environments, periods can be as short as every
SERVICE LEVEL
- Measures the performance of the system
- The complement of the probability of a stock out
“Stock out “when an inventory items runs out
- Should not be confused with fill rate
“Fill rate – a measure of how effective inventory is at meeting demands.
SUPPLY CHAIN management
- Describes the coordination of all supply chain activities, starting with raw
materials and ending with a satisfied customer.
- Includes activities required to manage the flow of materials, information,
people, and money from the suppliers’ suppliers to the customers’
customers.
- The integration of and coordination between s number of traditional
business functions, including purchasing, operations, transportation,
distribution and logistics, marketing sales, and information systems and
technology.
- OBJECTIVE : to coordinate activities within the supply chain to maximize the
supply chain’s competitive advantage and its benefits
MANAGING INVENTORIES AND SOURCING
- Good supply chain management produces lower total system cost (lower
inventory, higher quality, higher service levels, increased revenues, and
increased profits for the supply chain.
- A key issue revolves around how the supply chain will share the benefits of
improvements among players or partners in the supply chain.
 SOURCING STRATEGIES
- MANY SUPPLIERS
o May be used for commodity products, where purchasing is typically
based on price.
o The suppliers compete with each other, which produces cost savings
for the buyer.
- FEW OR SINGLE SUPPLIER
o The buyer forms long- term relationships with fewer suppliers to
create value through economies of scale and learning- curve
improvements.
o Suppliers are more willing to participate in JIT programs and
contribute design and technological expertise, but the cost of change
suppliers (And bringing them up to speed) is high.
- VERTICAL INTEGRATION
o Integration may be forward, towards the customer, or backward,
towards suppliers.
o Can improve coast, quality, and inventory, but it requires capital,
managerial risky in industries experiencing rapid technological
change.
JOINT VENTURE
o Companies formally collaborate with one another.
o Skills are enhanced, supply is secured, and costs are reduced,
producing benefits for all of the participants.
MANAGING AND INTEGRATED SUPPLY CHAIN
- Issues in managing the integrated supply chain:
Local optimization can magnify fluctuations.
-The BULLWHIP EFFECT occurs when orders are relayed through the supply
chain, increasing at each step.
- Incentives push merchandize into the supply chain for sales that have not
occurred.
 - Large lots reduce shipping costs, but increase inventory holding costs and
do not reflect actual sales.
OPPORTUNITIES TO ADDRESS SOME OF THESE ISSUES:
- Accurate “pull” data, shared information
- Lots size reduction coupled with reduced ordering costs.
- Single stage control of replenishment where there is a single supply chain
member responsible for ordering.
- Vendor managed inventory (VMI), a common practice at the downstream
supply chain partner.
- Collaborative planning, forecasting
- Blanket order against which actual orders are released
- Electronic ordering and funds transfer speed transactions and reduce
paperwork.
- Drop shipping and special packaging by passes the seller and reduce costs.
SUPPLY CHAIN RISKS
- More reliance on supply chains means risk
- Fewer suppliers increase dependence
- Globalization and logistical complexity
- Vendor reliability and quality risks
- Political and currency risks
RISK AND MIGTIGATIOON TACTICS
- Research and assess possible risks
- Innovative planning
- Reduce potential disruptions
- Prepare responses for negative events
- Flexible, secure supply chains
- Diversified supplier base
REAL WORLD RISK MITIGATION EXAMPLES
- When MC DONALDS opened in Russia, there was a real risk the supplier
would fail to deliver the inputs ordered.
 (One relevant risk reduction tactic is to use multiple suppliers, employ
contracts with penalties, pre – plan the supply chain, and keep other
subcontractors on retainer)
(Every plant involved in MC Donald production in Russia- bakery, meat,
chicken, fish, and lettuce-
- DARDEN RESTAURANTS in an effort to avoid suppliers quality failure,
engages in careful supplier selection, training, certification and monitoring.
- It has placed extensive controls, including third party audits, on supplier
processes and logistics. This ensures constant monitoring and thus
reduction risk.
- WALMART has its own trucking fleet and employs numerous distribution
centers throughout the United States.
- Using multiple, redundant transportation models and warehouses, secure
packaging, and contracts with penalties is one way to prevent logistics
delays and damage to inputs.
- When necessary, Walmart finds alternative origins and delivery routes,
bypassing problem areas.
REAL-WORLD RISK MITIGATION EXAMPLES
TOYOTA trains its dealers around the world to monitor, select, and contract
carefully with its distributors.
- The principle of the Toyota production system help dealers to improve
customer service, used –car logistics, and body and paint operations.
- Toyota also provides an excellent example of how to deal with the risk of
natural disasters, such as earthquakes, fires, and tsuanamis.
- It maintains at least two suppliers in different geographical regions for each
component.
BOEING uses a state-of-the-art internal communication system that transmits
engineering scheduling, and logistics data to Boeing facilities and suppliers
worldwide.
- The use of redundant databases, secure IT systems, and training
HONDA AND NISSAN have moved manufacturing out of Japan as a means of
combating economic risk.
 - Hedging to combat exchange rate risk, and employing purchasing contracts
that address price fluctuations
- The exchange rate for the Japanese yen makes Japanese- made auto
mobiles
TO POSTION YOURSELF FRO PROFIT, YOU MUST MANAGE INVENTORY
- Managing the inputs of production- and ultimately making sure you have a
product on the shelves to sell you customers- is a critical part of managing
you business.
- to position itself for economic advantage, a company must manage its
inventory if it is to meet the anticipated demand for what it produces.
- Savvy business leaders must come to terms with inventory as a critical
component of ongoing operation
CHAPTER 8 PRODUCT QUALITY

INTROUCTION
DEFINITION:
- The group of features and characteristics of saleable good which determine
its desirability and which can controlled manufactures to meet certain basic
- PRODUCT QUALITY IS THE PRODUCTS ABILITY TO FULFIL THE
EXPECTATIONS AND
- NEEDS SET BY THE END USER
(DUPLICATE PRODUCT) (ORIGINAL)
CLASSIFICATION
CLASSIFICATION OF PRODUCT QUALITY
- MEASURED CHARACTERISTICS includes shape, size, color, strength,
appearance, height, weight, thickness, diameter, volume, fuel
consumption.
- ATTRIBUTES CHARACTERISTICS check and controls defective pieces per
batch, defects per item, number of mistakes per page, cracks in crockery,
double- threading in textile material, discoloring in garment.
 IMPORTANT FACTORS FOR PRODUCT QUALITY
THEY INCLUDE:
- The type of raw materials used for making a product.
- How well are various production- technologies implemented
- Skill and experience of manpower that is involved in the production
process.
- Availability of production- related overheads like power and water supply,
transport.
SPECIFICATION AND CHARACTERISTICS
- DIMENSIONS length, diameter, thickness, or area
- PHYSICAL PROPERTIES weight, volume, or strength
- ELECTRICAL PROPERTIES resistance, voltage, or current
- APPEARANCE finish, color or texture
- FUNCTIONAL QUALITIES output or kilometer per liter
- EFFECTS ON SERVICE taste, feel, or noise level.
NEED FOR PRODUCT QUALITY
- If a product fulfills the customer’s expectations, the customer will be
pleased and consider that the product is of acceptable or even high quality.
- Quality needs to be defined, which vary from the product to product.
- To ensure product quality, the entire process of producing the product
must be “established and streamlined”.
THIS INVARIABLY INCLUDES:
- FIXING PRODUCT SPECIFICATIONS
- PREPARING PRODUCT DESIGN
- PROCURING SUITABLE RAW MATERIALS
- PREPARATION FOE MANUFACTURE
- MANUFACTURING AND POST MANUFACTURING
- END/FINAL PRODUCT IN HANDS OF THE CUSTOMER.
(CONTD)
 - In many instances, however, correction of quality deficiencies is also
required at the end of the process since in spite of all the efforts made, the
required quality will sometimes not be attained and a company may be
faced
- Corrective and preventative actions
FOCUS ON PRODUCT QUALITY
BEFORE PRODUCTION company must found out the needs of the customers these
needs must be included in the product design specifications.
DURING PRODUCTION company must have quality control at all stages of the
production process. There must have quality control for raw materials, plant and
machinery
ATER PRODUCTION the finished- product must conform (match) to the product
design specifications
PARAMETERS OF PRODUCT QUALITY
EIGHT PARAMETERS can be used at a strategic level to analyze
Product quality characteristics. They are as follows:
- PERFORMANCE
- FEATURES
- RELIABILITY
- CONFORMANCE
- DURABILITY
- SERVICEABILITY
- AESTHETICS
- PERCEIVED QUALITY
(1) PERFORMANCE refers to a product’s primary operating/involves
measurable attributes, brands
(2) FEATURES are additional characteristics that enhance the appeal
- Secondary aspects of performance. Examples (cruise, leather seats, smart
parking.
(3) RELIABILITY is the likelihood that a product will not fail within specific time
period
 - The likelihood that the product will not fail within a specific time
- The common measure of reliability is the failure rate per unit time.
(4) CONFORMANCE is the precision with which the product or service meets
the specified standards.
- To what extent the product design and operating characteristics
(5) DURABILITY measures the length of a product’s life.
- Reliability and durability are closely linked
(6) SERVICE ABILITY is the speed with which the product can be put into service
when it breaks down.
- Means the consumer’s ease of obtaining repair service
- This includes :
RESPONSIVENESS OF SERVICE PERSONNEL
WILLINGNESS OF REPAIR PERSONNEL
RELIABILTY OF SERVICE
SPEED
(7) AESTHETICS is the human perception of beauty, sight, sound, smell, how
product looks, feels, sounds, tastes or smells. This is a matter of personal
judgment.
(8) PERCEIVED QUALITY is the quality attributed to a good or service based on
in direct measures.
- Reputation is the primary stuff of perceived quality
- The perceived quality may be based on images, advertising and brand
names.
- Perception is not always reality.
IMPORTANCE OF PRODUCT QUALITY
FOR COMPNAY it is because, bad quality products will affect the consumer’s
confidence, image and sales
FOR CONSUMERS they are ready to pay high prices, but in return they expect best
quality products
PRODUCT QUALITY ASPECTS
- QUALITY OF DESIGN
- QUALITY CONFORMANCE
- PROPER STORAGE SAFETY
 - RELIABILITY
PRODUCT QUALITY TESTING
- Testing is done as an integral part of the manufacturing process to ensure
quality.
- Product testing seeks to ensure that consumers can understand what
products will do for them and which products are the best value.
- PRODUCT TESTING:
- Income testing
It prevent the entry of those goods that do not fulfill the quality
requirements
- IN –process testing
o It provides data for making decisions on the products as well as thep
process
- Final testing
It is done only when the manufacturing process is complete.
PURPOSE OF PRODUCT TESTING
Determine if or verify that the requirements of a specification, regulation,
or contract are met
Decide if a new product development program is on track: demonstrate
proof of concept.
Provide standard data for other scientific
Validate suitability for end use
Provide a basis for technical communication
Provide a technical means of comparison
Provide evidence in legal proceedings product liability
Help solve problems with current product
Help identify potential cost savings in products.
Example:
DAIRY PRODUCT:
- Quality control of milk products and packaging are carried out by equipped
laboratories in the factory
- Procedural steps :
Receive milk
Take a sample
Conduct physical, chemical, sensory tests of raw milk
Milk received in the lab is to identify whether it meets the necessary standards or
not.
Example of an Ice cream it needs to be smooth not grainy so therefore testing
should be done so that the quality of the product can be maintained
Example of a table it should be smooth not rough from the top therefore testing
should be done.