Material and Inventory

Management
UNIT 3
Production Planning
• Production planning is one part of production planning and control dealing with basic concepts of
what to produce, when to produce, how much to produce, etc. It involves taking a long-term view
at overall production planning. Therefore, the objectives of production planning are as follows:
• To ensure right quantity and quality of raw material, equipment, etc. are available during times of
production.
• To ensure capacity utilization is in tune with forecast demand at all the times.
A well thought production planning ensures that the overall production process is streamlined
providing the following benefits:
• Organization can deliver a product in a timely and regular manner.
• Suppliers are informed well in advance of the requirement of raw materials.
• It reduces investment in inventory.
• It reduces overall production cost by driving inefficiency.
• Production planning takes care of two basic strategies’ product planning and process planning.
Production planning is done at three different time-dependent levels i.e. long-range planning
dealing with facility planning, capital investment, location planning, etc.; medium-range planning
dealing with demand forecast and capacity planning, and lastly, short term planning dealing with
day-to-day operations.
Production Control
Production control looks to utilize a different types of control techniques to achieve optimum
performance out of the production system to achieve overall production planning targets. Therefore,
the objectives of production control are as follows:
• Regulate inventory management
• Organize the production schedules
• Optimum utilization of resources and production process
Production control cannot be the same across all the organizations. Production control is dependent
upon the following factors:
• Nature of production(job-oriented, service-oriented, etc.)
• Nature of operation
• Size of operation
Production Planning and Control
• Production planning and control is a predetermined process that
includes the use of human resources, raw materials, machines, etc.
PPC is the technique to plan each and every step in a long series of
separate operations. It helps to make the right decision at the right
time and at the right place to achieve maximum efficiency.
• It is the nervous system of a production operation.
• The primary concern of production , planning and control in the
delivery of products to customers or to inventory stocks according to
some predetermined schedule
• Production planning and control (or PPC) is defined as a work process
which seeks to allocate human resources, raw materials, and
equipment/machines in a way that optimizes efficiency.
• In layman’s terms, PPC helps manufacturers work smarter in
allocating internal resources of people, materials, and machines in
order to meet the demands of customers.
• What to produce Product Planning & Development including
product design
• How to produce Material Planning, Process Planning, Tool
equipment planning
• Where to produce Facilities planning, Capacity planning,
Subcontracting
• When to produce Production scheduling, Machine loading
• Who will produce Manpower planning
• How much to produce Qty Planning, Economic batch size
Characteristics of PPC
• Inputs like materials, men, and machines are efficiently used
• Factors of production are integrated to use them economically
• Division of work is undertaken carefully so that every available
element is properly utilized
• Work is regulated from the first stage of procuring raw material to
the stage of finished goods.
• Questions like what, when, and how to be manufactured are decided
BENEFITS OF PRODUCTION PLANNING AND CONTROL

• Improved organization for regular and timely delivery

• Better supplier communication for raw materials procurement
• Reduced investment in inventory
• Reduced production cost by increasing efficiency
• Smooth flow of all production processes
• Reduced waste of resources
• Production cost savings that improve the bottom line
OBJECTIVES OF PRODUCTION
PLANNING AND CONTROL
• Regulation of inventory management
• Optimum utilization of production process and resources
• Organization of the production schedules, typically with the help of
dynamic production scheduling software
• To make sure the right quality and quantity of equipment, raw materials and more
are available during production times
• To ensure capacity utilization is aligned with forecast demand
• Optimum utilization of organizational resources
• Continuous Flow of Production
• Deliver good quality product at minimum cost
• Reduce production cycle time
• Flexibility in production processes
• Coordination between various departments
• Optimum Inventory Levels
• Plan for future requirements
• Remove bottlenecks of production
• Customer Satisfaction
• Production and Employment Stabilization
Role of PPC
• Taking orders from marketing division.
• Analyzing the orders & feeling the requirements of customer.
• Planning for production.
• Cost analysis & lead time
ROUTING
• Routing is the first step in production planning and control.
• Routing can be defined as the process of deciding the path
(route) of work and the sequence of operations.
• “Routing means determination of the route to be
followed by each part/component being transformed
from input/raw material into final product.”
• Routing of a production order contains complete information of
the product to be manufactured, complete details of each
operation to be performed, the set up time and the standard
time needed for completing the job/product.
Functions of Routing:
• (i) The future product exists only as an idea in the mind of the
inventor and he draws the sketch.
• (ii) The possible product is deeply analysed, studied and
developed to prepare the drawings.
• (iii) The next step is preparation of working drawings which
may include the parts and assemblies drawings.
• (iv) Blue prints of the drawings with necessary technical details
are prepared.
Routing Procedure:
• (i) Make and Buy Decision:
• The product to be manufactured and as parts needed are thoroughly analyzed to determine
which parts/components are to be made and which are to be purchased in view of the
following facts:
• (i) Cost comparison for making and buying.
• (ii) Whether the available manpower can be utilized for the purpose of making within the plant.
• (iii) Whether the existing machines which are idle can be utilized.
• (iv) Whether the input materials and machines are available in the plant for manufacture or require
procurement
• (ii) Bill of Material:
• After proper analysis of the product the quality and quantity of materials required are determined
and the bill of materials is prepared.
• (iii) Preparation of Route Sheet
• The third step of the routing procedure is the determination of operations required together with
their sequence to manufacture the product. The routing decision establishes the operations
necessary for processing the product and lists them in their sequence on the route sheet or
operation sheet.
• (iv) Lot Size Determination
• In case of mass or continuous production systems, the mathematical relations can be used to find
out the lot size to be processed. The idea is to determine the number of units to be produced in one
lot. If the product is to be produced to fulfill the consumer requirements, the question to determine
the lot size does not arise.
• (v) Determination of Scrap Factor:
• The amount of waste that depends on the scraping factors is estimated. The scrap factor is the
anticipated normal scrap encountered during the course of manufacturing. As we know that all
components produced at various workstations do not meet the required standards and those which
do not pass inspection are to be neglected as scrap.
• (vi) To Provide Necessary Information and Forms:
• In order to carry out routing as planned various forms and
procedures are required which furnish necessary information
for the purpose. Various forms used e.g. production order, job
ticket, inspection ticket, move order, tool ticket and equipment
ticket are also prepared in this process.
Advantages of Routing:
• (i) Effective utilization of available resources.
• (ii) Reduction in production costs.
• (iii) Quality improvement occurs,
• (iv) Productivity of the system improves and
• (v) Provides a basis for loading & scheduling
Scheduling
• Scheduling is the process of prescribing “When” each operation in a production
process is to be executed. According to Kimball and Kimball, Scheduling is “The
determination of time that is required to perform each operation and also the
time required to perform the entire series of operations as routed.”
• Scheduling can be termed as:
• (i) A detail of when and where each operation in the manufacturing process is to
be performed or executed.
• (ii) Establishment of an activity timetable which gives at which time to start
and/or finish each event or operation comprising any procedure or process
Objectives of Scheduling
• (i) In order to meet the delivery dates the sequence of operations is properly
planned.
• (ii) To have minimum total time of production by having better resources
utilisation.
• (iii) For having maximum capacity utilization and reducing the labour cost by
minimization of idleness of machines and manpower.
• (iv) To avoid unbalanced allocation of work among the various departments and
workstations
Factors Affecting Scheduling:
• External Factors:
These are the factors which are not within the control of the organization’s
management. They are dictated by the outside forces to which the management
adjusts.
• i) Customer’s demand: This demand is estimated by the sales forecasting
deptt. Scheduling is based on the forecasts of the expected sales of specific
products in the continuous production. The forecast is made on the basis of
expected volume of business in case of intermittent production.
• (ii) Delivery dates of customer’s: In a continuous or mass production
with seasonal demand, the scheduling should be decided in such a way that
there is a balanced production throughout the year reducing the stock of
inventories with a constant level of production. In case of the intermittent
production with the seasonal demand, it may be adjusted by giving delivery on
agreeable delivery dates to the consumer orders.
• (iii) Stock of goods already lying with dealers and retailers: This situation
arises in case of continuous production of standardized goods. Usually the dealers
and retailers are maintaining certain stock levels with them. The scheduling
should be based on the stock position with the retailers and dealers.
• Internal Factors:
• The factors within the control of management should be manipulated in such a
way that the objectives of the production function can be achieved most
efficiently and economically.
• Some important such factors are as follows:
• 1. The stock of Finished Products with the Enterprise: Where the production is
made to stock, the scheduling should be adjusted to the stock of finished products
with the dealers. The new sales forecast should be made and the scheduling should
be done in the light of the fluctuations in the stock holding.
• 2. Time Interval to Process Finished Products from Raw Material:
• This is the time required to process every sub-assembly and the finished product from the raw
materials.
• 3. Availability of Machines and Equipment: The various machines and equipment have varying
production capacities. Moreover, their occupancy scheduling can be prepared with the help of
machine load charts.
• 4. Availability of Manpower:
• The scheduling should be done in light of the availability of the manpower. The production rush
should be adjusted to overtime working or hiring of temporary labor.
• 5. Availability of Materials:
• Sometimes stock-out conditions interrupt the production flow. Proper stock levels should be
maintained to facilitate scheduling in continuous production. In case of probable stock out of
strategic goods, extra efforts should be made to procure them as far as possible and the limited
stock in hand should be issued only for critical operations.
• 6. Manufacturing Facilities: The manufacturing facilities in terms of power requirements,
material handling services, storekeeping and such other facilities should be provided inaccurate
quantities so that it may not affect the smooth production flow adversely and facilitate the
scheduling function
• 7. Feasibility of Economic Production Runs:
• Under the economic lot production, the two costs i.e. set up cost and the carrying
cost are equated.
• 8. Types of Manufacturing a Product:
• This determines the proper scheduling procedure.
• Advantages:
• (i) Very simple and easy to understand
• (ii) It provides an overall picture and current production schedule
• (iii) Can be easily maintained by non-technical staff
• (iv) Making and maintenance of this chart is cheap
• (v) In view of the rush of orders certain percentage of total capacity can be
reallocated.
• Disadvantages:
• (i) Provides only the overall picture and detailed operations are not indicated.
• (ii) It does not provide detailed information, so this system is applicable for
smaller plants.
LOADING
• Loading involves assigning jobs to work centers or machines in the work
centers while sequencing is concerned with determining the order in which
jobs will be processed. (Sawit, 2005) The process of assigning jobs to work
centers or outsources is referred to as loading, sequencing, dispatching,
or scheduling.
• Loading means the assignment of Jobs to work or processing centers. •
Work centers are areas in a business in which productive resources are
organized and work is completed. • It may be a single machine, a group of
machines, or an area where a particular type of work is done. • The work
centers can be organized in a variety of ways including by function in a job-
shop configuration; or by-product in a flow, assembly line, or group-
technology-cell configuration. •
PHASES OF PRODUCTION PLANNING AND CONTROL

ROUTING
• This part of planning involves the precise route a product or the materials take on
the production line. The whole operation is planned and designed carefully, and the
pat and sequential order is determined and agreed on. At this stage, what equipment
is used, and resources will be considered.
SCHEDULING
• The scheduling state is used to determine the time needed for the process, resources,
and machines to complete a certain step, activity, or task.
LOADING
• This is when the execution of the scheduling and the routing occurs. The load at
each of the routing points and the start-end of an operation or activity are checked
for resource support and help. It’s during this step that the assignment of individual
work will take place. It is also when efficiency will be put to the test.
DISPATCHING
• This is the stage when the real work starts and the actual implementation of the
plans that were made are put into production. During this stage, you will have
production orders issued to be the operations and to fuel the onward movement on
the production line.
FOLLOW-UP
• There’s no way to know how effective a particular process is unless you follow up
on it after an evaluation. You need to look for any visible or possible bottlenecks
at this point that may hinder the seamless flow of the production line at any stage.
INSPECTION
• Inspection bouts and audits should be conducted to ensure everything under the
production scanner is adhered to the proper quality standards.
CORRECTION
Once the steps above are done, the results will be seen, and you can take action to
correct any issues. This is crucial to make the process more efficient in the future.
The Types of Scheduling in Production
Planning and Control
• 1) Master Production Scheduling
• Master Production Scheduling (MPS) is a scheduling strategy that dictates when and
how much of each product is going to be produced based on criteria such as demand,
capacity, and inventory availability.
• This type of scheduling focuses on a planning horizon that is divided into equal time
period (called ‘time buckets’). It includes a plan for the production of certain products
and defines resources, staffing, inventory, etc required for the allotted time period.
• MPS aids in decision making by generating a set of output data based on inputs such as:
• Forecasted demand
• Production costs
• Inventory costs
• Customer needs
• Production lead time
• Capacity
• The resulting output information includes:
• The amounts to produce
• Staffing requirements
• Quantity of products Available to Promise
• Projected available funds for production
• It also sets the expectations of the revenue that the business is likely to
generate. These outputs can then be used to create a Material
Requirements Planning (MRP) schedule.
• 2) Manufacturing and Operation Scheduling
• Manufacturing Scheduling (also called ‘Detailed Scheduling’ or ‘Production
Scheduling’) focuses on a shorter horizon than MPS.
• This type of scheduling fixes a time and a date to each operation in a continuous
timeline rather than in time buckets. Each process can then be visualized in terms
of its start time and completion time-frame. The subsequent stages of production
planning and control depend on this timeline.
• Scheduling looks to optimize the use of time in each step of the production
process, from raw or intermediate materials to the delivery of the finished good to
the customer.
• The goal is to maximize throughput (output) and on-time delivery within the
constraints of equipment, labor, storage, and inventory capacity. This usually
involves maximizing the utilization of critical bottleneck resources by:
• Minimizing changeovers
• Minimizing cleanout intervals
• Avoiding material starvation
What is a Master Production Schedule
(MPS)?
• The master production schedule is a production planning tool that defines
how much of a product needs to be manufactured at different periods. This
simple schedule can be used as a basis for further planning and scheduling
throughout the business.
• Master Production Schedule (MPS) is the part of production planning that
outlines which products need to be manufactured, in which quantity, and
when. A master production schedule does not usually go into detail
regarding the materials to be used in production, employees assigned to
tasks, etc. Rather, it is like a contract between the sales department and the
manufacturing department that balances supply and demand by defining
the necessary quantities to produce and the timeframes of production.
• The basic inputs you need to create a viable master production
schedule are the following:
• 1. Starting inventory. How many units are already available in stock?
• 2. Sales forecast. How many orders are expected for the period?
• 3. Current order portfolio. How many orders are already planned for the
period?
• 4. Quantity to produce. How many units need to be produced during the
period to keep supply and demand in balance?
• 5. Safety stock. How many units do you want to keep in inventory in case
there are spikes in demand?
• In the master production schedule, safety stock will be expressed as part of
the period’s ending inventory that will be transferred to the next period as
beginning inventory.
• 6. Production capacity. How many products would you be able to
produce during the period, given that everything is running smoothly?
• Rough-cut capacity planning is an important tool to use alongside the
master production schedule. To calculate your production capacity,
you will need to know your products’ throughput time and the total
productive hours of your shop floor.
• https://www.erp-information.com/master-production-schedule.html
Aggregate Planning
• Aggregate planning is an operational activity critical to the organization as it looks to balance
long-term strategic planning with short-term production success.
• Aggregate planning is a method for analyzing, developing, and maintaining a manufacturing plan
with an emphasis on uninterrupted, consistent production. Aggregate planning is most often
focused on targeted sales forecasts, inventory management, and production levels in the mid-term
(3-to-18-month) future.
• Aggregate planning defines the necessary production inputs for a good or service (including
facilities, workforce, raw materials and inventory levels) to maintain consistent delivery dates, all
while keeping costs down.
Aggregate Planning Strategies
1.Level Strategy - As the name suggests, the level strategy looks to maintain a
steady production rate and workforce level. In this strategy, an organization
requires a robust forecast demand as to increase or decrease production in
anticipation of lower or higher customer demand. The advantage of a level
strategy is the steady workforce. The disadvantage of level strategy is high
inventory and increase backlogs.
2.Chase Strategy - As the name suggests, chase strategy looks to dynamically
match demand with production. The advantage of chase strategy is lower
inventory levels and backlogs. The disadvantage is lower productivity, quality and
depressed workforce.
• 3. Hybrid Strategy – As the name suggests, the hybrid strategy looks
to balance between level strategy and chase strategy This keeps the
balance between the production rate, workforce, and inventory levels,
while still responding to demand as it changes. This alternative offers
a bit of flexibility that can satisfy demand while working to keep
production costs low.
Importance of Aggregate Planning
• Aggregate planning plays an important part in achieving long-
term objectives of the organization. Aggregate planning helps in:
• Achieving financial goals by reducing overall variable cost and
improving the bottom line
• Maximum utilization of the available production facility
• Provide customer delight by matching demand and reducing
wait time for customers
• Reduce investment in inventory stocking
• Able to meet scheduling goals there by creating a happy and
satisfied work force
What Is Inventory Management?
• Inventory management refers to the process of ordering, storing,
using, and selling a company's inventory. This includes the
management of raw materials, components, and finished products,
as well as warehousing and processing of such items.
• Inventory represents a current asset since a company typically
intends to sell its finished goods within a short amount of time,
typically a year. Inventory has to be physically counted or measured
before it can be put on a balance sheet. Companies typically
maintain sophisticated inventory management systems capable of
tracking real-time inventory levels.
• Inventory management is the entire process of managing
inventories from raw materials to finished products.
• Inventory management tries to efficiently streamline inventories to
avoid both gluts and shortages.
• Two major methods for inventory management are just-in-time (JIT)
and materials requirement planning (MRP)
• Just-in-Time Management (JIT) — This manufacturing model
originated in Japan in the 1960s and 1970s. Toyota Motor (TM)
contributed the most to its development.1
• The method allows companies to save significant amounts of money
and reduce waste by keeping only the inventory they need to produce
and sell products. This approach reduces storage and insurance costs,
as well as the cost of liquidating or discarding excess inventory.
• JIT inventory management can be risky. If demand unexpectedly
spikes, the manufacturer may not be able to source the inventory it
needs to meet that demand, damaging its reputation with customers
and driving business toward competitors. Even the smallest delays
can be problematic; if a key input does not arrive "just in time," a
bottleneck can result.
• Materials requirement planning (MRP) —
This inventory management method is sales-forecast
dependent, meaning that manufacturers must have accurate sales
records to enable accurate planning of inventory needs and to
communicate those needs with materials suppliers in a timely
manner.
• For example, a ski manufacturer using an MRP inventory system
might ensure that materials such as plastic, fiberglass, wood, and
aluminum are in stock based on forecasted orders. Inability to
accurately forecast sales and plan inventory acquisitions results in a
manufacturer's inability to fulfill orders.
• Economic Order Quantity (EOQ) —
This model is used in inventory management by calculating the
number of units a company should add to its inventory with each
batch in order to reduce the total costs of its inventory while assuming
constant consumer demand.
The costs of inventory in the model include holding and setup costs.
The EOQ model seeks to ensure that the right amount of inventory is
ordered per batch so a company does not have to make orders too
frequently and there is not an excess of inventory sitting on hand.
It assumes that there is a trade-off between inventory holding costs
and inventory setup costs, and total inventory costs are minimized
when both setup costs and holding costs are minimized.
13 Types of Inventory
1.Raw Materials:
Raw materials are the materials a company uses to create and finish products.
When the product is completed, the raw materials are typically unrecognizable
from their original form, such as oil used to create shampoo.
2.Components:
Components are similar to raw materials in that they are the materials a company
uses to create and finish products, except that they remain recognizable when the
product is completed, such as a screw. Work In Progress (WIP):
WIP inventory refers to items in production and includes raw materials or
components, labor, overhead and even packing materials.
3.Work In Progress (WIP):
WIP inventory refers to items in production and includes raw materials or
components, labor, overhead and even packing materials.
4.Finished Goods:
Finished goods are items that are ready to sell.
5. Maintenance, Repair and Operations (MRO) Goods:
MRO is inventory — often in the form of supplies — that supports making a
product or the maintenance of a business.
6. Packing and Packaging Materials:
There are three types of packing materials. Primary packing protects the product
and makes it usable. Secondary packing is the packaging of the finished good
and can include labels or SKU information. Tertiary packing is bulk packaging for
transport.
7. Safety Stock and Anticipation Stock:
Safety stock is the extra inventory a company buys and stores to cover unexpected
events. Safety stock has carrying costs, but it supports customer satisfaction.
Similarly, anticipation stock comprises of raw materials or finished items that a
business purchases based on sales and production trends. If a raw material’s price
is rising or peak sales time is approaching, a business may purchase safety stock.
8. Decoupling Inventory:
Decoupling inventory is the term used for extra items or WIP kept at each production
line station to prevent work stoppages. Whereas all companies may have safety stock,
decoupling inventory is useful if parts of the line work at different speeds and only
applies to companies that manufacture goods.
9. Cycle Inventory:
Companies order cycle inventory in lots to get the right amount of stock for the lowest
storage cost. Learn more about cycle inventory formulas in the “
Essential Guide to Inventory Planning.
10. Service Inventory:
Service inventory is a management accounting concept that refers to how much service
a business can provide in a given period. A hotel with 10 rooms, for example, has a
service inventory of 70 one-night stays in a given week.
11. Transit Inventory:
Also known as pipeline inventory, transit inventory is stock that’s moving between the
manufacturer, warehouses and distribution centers. Transit inventory may take weeks
to move between facilities.
12. Theoretical Inventory:
Also called book inventory, theoretical inventory is the least amount of
stock a company needs to complete a process without waiting.
Theoretical inventory is used mostly in production and the food
industry. It’s measured using the actual versus theoretical formula.
13. Excess Inventory:
Also known as obsolete inventory, excess inventory is unsold or unused
goods or raw materials that a company doesn’t expect to use or sell, but
must still pay to store.
KANBAN
• Kanban (Japanese for sign) is an inventory control system used
in just-in-time (JIT) manufacturing to track production and order
new shipments of parts and materials. Kanban was developed
by Taiichi Ohno, an industrial engineer at Toyota, and uses
visual cues to prompt the action needed to keep a process
flowing.
Kanban Definition
• Kanban is the Japanese word for “card”. In Toyota, assembly line
workers used cards to communicate when they needed something from
another department or process.
• This helped them reduce waste and increase their process efficiency.
Kanban provides a visual for both the workflow and the actual work
that goes through the workflow.
• Ever since its creation, it has helped organizations identify potential
issues and bottlenecks in the workflow, allowing them to resolve the
issue and let workflow efficiently at an optimal pace or throughput.
The Growth of Kanban
• What originated from the manufacturing industry is now being used in various
businesses. We now see Kanban in knowledge work, quite prominently in software
development.
• It was David J. Anderson, a renowned Lean thinker, who first explored the use and
applied Kanban to software development in 2004. He also wrote his own book,
Kanban: Successful Evolutionary Change for your Technology Business, in 2010 and
founded Lean Kanban University later on.
• Anderson clarified that Kanban is not to be mistaken for software development or
project management process. He emphasized that Kanban is seen and used as a
method or technique to help an existing software development or project management
process improve gradually.
• Indeed, the application of Kanban is no longer confined to the manufacturing industry.
In recent years, we’ve seen Kanban being adapted to Agile Scrum – giving birth to
ScrumBan. We now see companies in the SaaS, software development, media,
investment, and banking industries reaping the benefits of the Kanban methodology in
their operations
How to Implement Kanban
TECHNIQUES IN INVENTORY
CONTROL
• ABC Analysis (Always Better Control)
• VED Analysis (Vital, Essential, Desirable)
• HML Analysis (High, Medium, Low)
• FSN Analysis (Fast, Slow moving and Non-moving)
• SDE Analysis (Scarce, Difficult, Easy)
• EOQ(economic order quantity)
FSN
• Fast-moving goods are the items in your stock that are utilized
regularly. There are usually basic day to day items that are used by
customers on a regular basis. There can fast moving and need to be
produced on regular basis. Fast moving goods usually have a low
profit margin. They are non-durable and sell at relatively low cost.
Examples, include milk, eggs, fruit and vegetables and over-the-
counter drugs like paracetamol and asprin.
• Fast-moving consumer goods have a high turnover rate and is also
very competitive. Some of the world's largest companies compete for
market share in this industry including Coca-Cola, Unilever, Procter &
Gamble, Nestlé, PepsiCo, etc.
FAST MOVING GOODS
• On the other hand, slow-moving goods are only used for a particular
timeframe. Slow moving inventory is defined as stock keeping units
(SKUs) that have not shipped in a certain amount of time, such as 90
or 180 days, and merchandise that has a low turn rate relative to the
quantity on hand. Slow moving goods can be problematic and can
contribute to waste of capital and resources.
• Non-moving goods are not utilized at all over a specific timeframe and
has a turnover rate below one. These are goods that are stocked up
over a long period of time. Now let’s find out what the inventory
control method, FSN analysis is.
What is FSN analysis?
• The fast-moving, slow-moving, and non-moving inventory control method
is classifying the goods/products based on the following parameters. The
FSN analysis segregates products based on their consumption rate, quantity,
and the rate at which the inventory is used. The FSN analysis is based on the
following parameters mentioned below:
• The consumption rate of a product: The average quantity of an item
consumed or expended during a given time interval.
• The average stay in inventory: Reflects how long did a specific product
take to get sold in a given period.
• Period of analysis: Define when you are conducting the analysis, in a year,
6 months, etc.
• For FSN analysis, the inventory turnover ratio (ITR) for each product should
also be calculated because the product is classified based on the ITR they
possess.
• The inventory turnover ratio of fast-moving goods is more than 3 and
accounts for approximately 10%-15% of the total inventory. Slow-moving
goods often have an ITR of 1-3 and account for 30%-35% of the total stock.
At the same time, the ITR of non-moving goods is below 1 and amounts to
60%-65% of the total inventory.
• Non- moving items constitute around 70% of the average cumulative stay
• Slow-moving stocks are 20% of the average cumulative stay
• Fast-moving products are 10% or less of the average cumulative stay
How to Conduct FSN Analysis?
• https://www.deskera.com/blog/fsn-inventory-analysis/
• For example, the cumulative number of inventory holding days for a
branded paid of shoes is 40 days, and total quantity of items received
is 10 with opening balance of 10.
• Average stay= 40 ÷ 10 + 20
• Average stay= 40÷ 30
• Average stay= 1.33
• Hence, average stay of the branded pair of shoes would be
approximately 2.
• Average stay = cumulative no. of inventory holding days [or unit of
time] ÷ (total quantity of items received + opening balance)
• Consumption rate = Total issue quantity ÷ Total duration
HML ANALYSIS
• HML analysis is an inventory method that categorizes inventory based
on a product's unit price. This method classifies inventory into the
following categories:
1.High Cost (H): Includes high unit value/cost products. Normally they
are 10-15% of the total items.
2.Medium Cost (M): Includes average or medium unit value items. 20-
25% of products fall into this category.
3.Low Cost (L): Includes items with low unit value. 60-70% of the
products are usually low-cost.
• The HML inventory analysis is a process where the inventory is broken
down into three groups based on their per-unit price. It helps in
simplifying the inventory management process — especially for large-
sized businesses with thousands of sales each day.
• HML inventory analysis lists down the inventory into the following
groups:
1.H (High Cost): It includes stocks/inventory with a high unit value.
2.M (Medium Cost): It provides a list of products with a medium unit
price value.
3.L (Low Cost): It comprises stock with a per-unit value on the lower end.
SDE ANALYSIS
• The SDE analysis is considered a common inventory
control and optimisation method. This is just one of many
optimisation methods that are used to take into account
variations in demand and supply, and replenishment
parameters to determine how much inventory to hold in order to
safeguard against such variations.