Unit 4: JIT, lean and inventory management
Production & Operations Management notes · PTU syllabus (MBA 205-18)
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Unit summary
Lean operations and well-managed materials cut cost and lead time. This unit covers the JIT approach and its implementation requirements, the Kanban system, inventory concepts, classification and objectives, the EOQ model, re-order level and ABC analysis, logistics and franchising, purchasing management objectives and procedures, and value analysis.
After this unit you can
- Explain JIT, its requirements and the Kanban system
- Explain inventory concepts and apply EOQ, ROL and ABC analysis
- Explain logistics and franchising in operations
- Explain purchasing procedures and value analysis
PTU syllabus topics
- JIT approach and implementation requirements
- Kanban system
- inventory concepts
- classification
- objectives
- EOQ model
- re-order level
- ABC analysis
- logistics and franchising
- purchasing management objectives and procedures
- value analysis
EOQ
√(2DS / H)
Reorder point
Daily demand × lead time + safety stock
Number of orders
D / EOQ
Total inventory cost
(D / Q) S + (Q / 2) H
Topic 1
JIT approach and the Kanban system
Just-in-Time (JIT) produces and delivers exactly what is needed, when it is needed, in the quantity needed — eliminating waste. Developed at Toyota (Taiichi Ohno). Seven wastes (muda): overproduction, waiting, transport, over-processing, inventory, motion and defects. Kanban is a pull-based signalling system: a card (or bin) signals the previous stage to produce or supply more only when parts are used. Requirements for JIT: reliable suppliers, small lot sizes, quick set-ups, preventive maintenance, flexible workers and good quality.
Trigger
Forecast and schedule
Actual customer demand
Inventory
Large buffers
Minimal
Lot size
Large
Small
Problems
Hidden by stock
Exposed and solved
Topic 2
Inventory concepts, classification and objectives
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 3
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
- Other selective controls: VED (vital, essential, desirable — spares), FSN (fast, slow, non-moving), HML (high, medium, low unit price).
Topic 4
Logistics and franchising
- Logistics: planning and controlling the flow and storage of goods, services and information from origin to consumption.
- 1
Order processing
- 2
Inventory management
- 3
Warehousing
- 4
Transportation
- 5
Materials handling and packaging
- 6
Information and tracking
- Third-party logistics (3PL): outsourcing logistics to specialists such as Delhivery and Blue Dart.
- Franchising: the franchisor licenses its brand, systems and know-how to franchisees for fees and royalties — an operations strategy for rapid, standardised expansion with less capital.
- Operations issues in franchising: standard operating procedures, training, central purchasing, quality audits, supply of key inputs.
Example
McDonald's India franchisees follow standard recipes, kitchen layouts and a cold chain run by logistics partners so a burger tastes the same in every city.
Topic 5
Purchasing management and value analysis
Purchasing acquires materials of the right quality, in the right quantity, at the right price, from the right source, at the right time.
- 1
Recognise the need
Purchase requisition
- 2
Find and select suppliers
Quotations, tenders
- 3
Place the purchase order
- 4
Follow up
- 5
Receive and inspect goods
- 6
Check invoice and pay
Methods: market purchasing, tender purchasing, rate contracts, centralised and decentralised purchasing, and e-procurement. Value analysis examines each component's function to achieve it at the lowest cost without reducing quality: Value = Function / Cost.
- Objectives of purchasing: continuity of supply, minimum investment in stock, quality, lowest total cost, supplier development, good records.
- Value engineering applies the same idea at the design stage, before production begins.
Key terms
- Kanban
- Card-based pull signal to produce or move parts
- EOQ
- Order size that minimises total ordering and holding cost
- VED analysis
- Classification of spares by criticality
- 3PL
- Outsourced logistics provider
- Value analysis
- Achieving required function at lowest cost
Quick revision
- JIT: seven wastes, requirements; Kanban; push vs pull.
- Inventory types, costs and objectives.
- EOQ = √(2DS/H); ROL; ABC, VED, FSN, HML.
- Logistics activities, 3PL; franchising operations.
- Purchasing objectives and procedure; value analysis (V = F/C).
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.What is JIT?
- Q2.Name the seven wastes.
- Q3.Calculate EOQ for D = 2,000, S = ₹40, H = ₹4.
- Q4.What is ABC analysis?
- Q5.What is third-party logistics?
- Q6.Define value analysis.
Long-answer questions
- Q1.Explain the JIT approach, its requirements and the Kanban system.
- Q2.Explain the EOQ model, reorder level and selective inventory control techniques.
- Q3.Discuss the role of logistics and franchising in operations.
- Q4.Explain the purchasing procedure and value analysis.
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