Unit 4: Inventory & quality management
Production and Operations Management notes · PTU syllabus (BBAGE 301-18)
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Unit summary
Inventory ties up money; too little stops production. Quality determines customer satisfaction. This unit covers inventory classification, objectives, costs, EOQ, reorder level and ABC analysis, and quality concepts, inspection, quality control, quality assurance, control charts and acceptance sampling.
After this unit you can
- Classify inventory and explain the objectives and costs of inventory management
- Calculate EOQ and reorder level and apply ABC analysis
- Distinguish inspection, quality control and quality assurance
- Explain control charts and acceptance sampling
PTU syllabus topics
- Classification and objectives of inventory management
- factors affecting inventory control policy
- inventory costs
- basic EOQ model
- re-order level
- ABC analysis
- quality concepts
- inspections vs. quality control vs. quality assurance
- control charts
- acceptance sampling
Economic Order Quantity
EOQ = √(2DS / H)
D demand, S ordering cost, H holding cost
Reorder level
Lead time × daily usage + safety stock
ABC analysis
A: ~10% items, ~70% value
C: ~70% items, ~10% value
Control charts
Mean ± 3σ limits
Topic 1
Inventory management
Inventory types: raw materials, work-in-progress, finished goods and maintenance, repair and operating (MRO) supplies. Objectives: smooth production, meet customer demand, protect against uncertainty, gain quantity discounts — while minimising cost.
| Inventory cost | Example |
|---|---|
| Ordering cost | Placing orders, transport, receiving |
| Carrying (holding) cost | Storage, insurance, interest, obsolescence |
| Shortage (stock-out) cost | Lost sales, idle production |
Factors affecting policy: demand pattern, lead time, cost of capital, storage space and perishability.
Topic 2
EOQ, reorder level and ABC analysis
Economic Order Quantity
EOQ = √(2DS / H)
D annual demand, S ordering cost per order, H holding cost per unit per year
Reorder level
Lead time demand + safety stock
Number of orders
D / EOQ
Example
D = 10,000 units, S = ₹50, H = ₹4. EOQ = √(2 × 10,000 × 50 / 4) = √2,50,000 = 500 units, so 20 orders a year.
A items
About 10%
About 70% — tight control
B items
About 20%
About 20% — moderate control
C items
About 70%
About 10% — simple control
Topic 3
Quality concepts, inspection, QC and QA
Quality is fitness for use (Juran) or conformance to requirements (Crosby).
Inspection
Checking products against specifications
Detects defects after production
Quality control
Monitoring processes with statistics
Detects and corrects
Quality assurance
Planned systems so quality is built in
Prevents defects
Topic 4
Control charts and acceptance sampling
Statistical quality control uses control charts to monitor a process: a centre line with upper and lower control limits (usually ±3σ). Points outside the limits signal assignable causes to be investigated.
- Charts for variables (measurable): x̄ chart (mean) and R chart (range).
- Charts for attributes (countable): p chart (proportion defective) and c chart (defects per unit).
Acceptance sampling inspects a sample from a lot to accept or reject the whole lot. Plans can be single, double or sequential; the operating characteristic (OC) curve shows the probability of accepting lots of different quality.
Key terms
- EOQ
- The order quantity minimising total ordering and holding costs
- Reorder level
- The stock level at which a new order is placed
- ABC analysis
- Classifying inventory by annual value
- Control chart
- A chart monitoring a process against control limits
- Acceptance sampling
- Accepting or rejecting a lot based on a sample
Quick revision
- EOQ = √(2DS/H).
- A items: few, high value — tight control.
- Inspection detects; QC monitors; QA prevents.
- x̄ and R charts for variables; p and c charts for attributes.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.List the types of inventory.
- Q2.Write the EOQ formula.
- Q3.What is ABC analysis?
- Q4.Differentiate between quality control and quality assurance.
- Q5.What is a control chart?
- Q6.What is acceptance sampling?
Long-answer questions
- Q1.Explain the objectives of inventory management and the costs involved.
- Q2.Calculate EOQ and the reorder level from given data and explain ABC analysis.
- Q3.Explain control charts for variables and attributes.
- Q4.Explain acceptance sampling and the OC curve.
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