Material Productivity

Material Productivity
By T. A. Khan
January 2008
RM Productivity
Raw materials productivity =
Output (value or unit or value added)

Value of Raw material used
How to Increase?
Efforts to reduce the cost of input materials.
Material productivity
Reduce scrap or waste so that a higher

percentage of the raw materials is utilised.
Use of non corrosive materials or coatings to
increase product life. (e.g. Bridges, highways
& tools etc.)
Reduce inventories to get higher returns per
unit of inventory item.
Cost of Input Materials
Reduce the actual quantity of materials used

per unit of the finished product.
Improve product design.

Improve manufacturing processes to:
Enhance product quality
Reduce material waste.
Improve Suppliers processes

Reduce inventory costs.
What is Inventory?
Stock of materials
Stored capacity
Examples
The Functions of Inventory
To provide a stock of goods that will

provide a selection for customers
To take advantage of quantity discounts
To hedge against inflation and upward price
changes.
Protect against shortages
WIP decouples production stages
The Functions of Inventory
Independence of operations
Decouple production & distribution
permits constant production quantities
Variation in demand
Flexibility in scheduling
Supply (lead-time) variability
Economic purchase order size
Disadvantages of Inventory
Higher costs
Item cost (cost of the item)

Ordering (or setup) cost
Holding (or carrying) cost
cost of forms, clerks wages, EDI system

Building lease, insurance, money tied up
Difficult to control
Hides production problems
Types of Inventory
Raw material
Work-in-progress
Maintenance/repair/operating supply
Finished goods
Defectives
Returns
Performance and WIP Level
Less WIP means products go through system faster

reducing the WIP makes you more sensitive to
problems, helps you find problems faster
Stream and Rocks analogy:
Inventory (WIP) is like water in a stream

It hides the rocks
Rocks force you to keep a lot of water (WIP) in the stream
Lowering Inventory Reduces

Waste
WIP hides problems

Waste
WIP hides problems

Waste
Reducing WIP makes
problem very visible
STOP

Waste
Remove problem, run

With less WIP

Waste
Reduce WIP again to find

new problems
The Material Flow Cycle
The Material Flow Cycle

Input
Other
Wait
Time
Move
Time
Queue
Time
Setup
Time
Run
Time
Output
Cycle Time
1
2
4
5
Run time: Job is at machine and being worked on

Setup time: Job is at the work station, and the work
station is being "setup."
Queue time: Job is where it should be, but is not being
processed because other work precedes it.
Move time: The time a job spends in transit
Wait time: When one process is finished, but the job is
waiting to be moved to the next work area.
Other: "Just-in-case" inventory.
Inventory Costs
Holding costs - associated with holding

or carrying inventory over time
Ordering costs - associated with costs
of placing order and receiving goods
Setup costs - cost to prepare a machine
or process for manufacturing an order
Holding (Carrying) Costs
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.
Inventory Holding Costs

Category
Housing (building) cost
Material handling
Labor cost
Opportunity/investment
Pilferage/scrap/obsolescence
Total Holding Cost
% of Value
6%
3%
3%
11%
3%
26%
Shrinkage Costs
How much is stolen?
2% for discount, dept. stores, hardware, convenience,

sporting goods
3% for toys & hobbies
1.5% for all else
Where does the missing stuff go?
Employees:
Shoplifters:
Administrative / paperwork error:
Vendor fraud:
44.5%
32.7%
17.5%
5.1%
ABC Analysis
Divides on-hand inventory into 3 classes
Basis is usually annual $ volume
A class, B class, C class

$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more

Give tighter physical control of A items
Forecast A items more carefully
Classifying Items as ABC

% Annual $ Usage
A
B
% of Inventory Items
Ordering Costs
Supplies
Forms
Order processing
Clerical support
Etc.
Setup Costs
Clean-up costs
Re-tooling costs
Adjustment costs
Etc
Inventory Models
Fixed order-quantity models

Economic order quantity
Production order quantity
Quantity discount
Probabilistic models
Fixed order-period models
EOQ Assumptions
Known and constant demand

Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts
Inventory Usage Over Time
Minimum
inventory
Inventory Level
Order quantity = Q
(maximum inventory
level)
Usage Rate
Average
Inventory
(Q*/2)
Time
EOQ Model
How Much to Order?
Annual Cost
Minimum
total cost
ve
r
u
C
ost
C
l
a
rve
u
Tot
C
st
o
C
ing
d
l
o
H
Order (Setup) Cost Curve

Optimal
Order Quantity (Q*)
Order quantity
EOQ Model Equations

Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders
d =
D
Working Days
ROP = d L
/ Year
2 D S
H
D
=N =
Q*
= Q* =
=T =
Working Days
/ Year
D = Demand per year

S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
Material productivity
Raw materials productivity =
Output (value or unit or value added)

Value of Raw material used
Value of
Perfect
Requirement
Value of Raw
Material used.
Value of
waste
Inventory
Costs
Improve Product Design
Improve Manufacturing Process

Improve Material Quality
Optimize Inventory carrying Costs
Optimize Inventory Ordering Costs
ABC Classification Solution

Stock #
Vol.
206
105
019
144
207
26,000
200
2,000
20,000
7,000
Total
Cost
$ Vol.
$ 36 $936,000
600 120,000
55 110,000
4
80,000
10
70,000
1,316,000
ABC
ABC Classification Solution
Deriving an EOQ
1.
2.
3.
4.
Develop an expression for setup or ordering

costs
Develop an expression for holding cost
Set setup cost equal to holding cost
Solve the resulting equation for the best
order quantity
Why Holding Costs Increase

More units must be stored if more are ordered
Purchase Order
Description
Qty.
Microwave
1
Order quantity
Purchase Order
Description
Qty.
Microwave
1000
Order quantity
Why Order Costs Decrease
1 Order (Postage $ 0.33)
1000 Orders (Postage $330)
Purchase Order
Description
Qty.
Microwave
1000
PurchaseOrder
Order
Purchase
PurchaseOrder
OrderQty.
Description
Purchase
Description Qty.
Qty.
Description
Microwave Qty. 11
Description
Microwave
Microwave
Microwave
11
Order quantity
EOQ Model
(When To Order)
Inventory Level
Average
Inventory
(Q*/2)
Optimal
Order
Quantity
(Q*)
Reorder
Point (ROP)
Lead Time
Time
The Reorder Point (ROP) Curve

Q*
Inventory level (units)
Slope = units/day = d
ROP
(Units)
Time (days)
Lead time = L
Sample Problem 1
Assume you have a product with the following

parameters:
Annual Demand = 360 units

Holding cost = $1.00 per unit
Order cost = $100 per order
What is the EOQ for this product? Assuming a

300-day work year, how many orders should
be processed per year? What is the expected
time between orders?
Problem 2 Solution
EOQ
2* Demand *Order Cost

2*360*100
72000 268.33 items

Holding cost
1
Demand 360
N
1.34 orders per year

Q
268
T
Working days
300 /1.34 224 days between orders
Expected number of orders

Material Productivity

Uploaded by

Copyright:

Available Formats

Material Productivity

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Material Productivity

Uploaded by

Copyright:

Available Formats

Material Productivity

Raw materials productivity =

Output (value or unit or value added)

Reduce scrap or waste so that a higher

Cost of Input Materials

Reduce the actual quantity of materials used

Improve product design.

Improve Suppliers processes

The Functions of Inventory

To provide a stock of goods that will

The Functions of Inventory

permits constant production quantities

Item cost (cost of the item)

Holding (or carrying) cost

cost of forms, clerks wages, EDI system

Performance and WIP Level

Less WIP means products go through system faster

Inventory (WIP) is like water in a stream

Lowering Inventory Reduces

WIP hides problems

Lowering Inventory Reduces

WIP hides problems

Lowering Inventory Reduces

Lowering Inventory Reduces

Remove problem, run

Lowering Inventory Reduces

Reduce WIP again to find

The Material Flow Cycle

The Material Flow Cycle

Run time: Job is at machine and being worked on

Holding costs - associated with holding

Holding (Carrying) Costs

Inventory Holding Costs

How much is stolen?

2% for discount, dept. stores, hardware, convenience,

Where does the missing stuff go?

Divides on-hand inventory into 3 classes

Basis is usually annual $ volume

A class, B class, C class

Policies based on ABC analysis

Develop class A suppliers more

Classifying Items as ABC

Fixed order-quantity models

Fixed order-period models

Known and constant demand

Inventory Usage Over Time

Order (Setup) Cost Curve

EOQ Model Equations

D = Demand per year

Output (value or unit or value added)

Improve Product Design

Improve Manufacturing Process

ABC Classification Solution

ABC Classification Solution

Develop an expression for setup or ordering

Why Holding Costs Increase

Why Order Costs Decrease

1 Order (Postage $ 0.33)

1000 Orders (Postage $330)