Unit 4: Inventory and modern manufacturing
Production Planning and Control notes · PTU syllabus (MBA 955-26)
On this page
Unit summary
Inventory control and modern manufacturing systems connect PPC with lean operations. This unit covers inventory functions and relevant costs, ABC and VED analysis, the EOQ model, P-system and Q-system inventory control, an introduction to MRP and ERP, line of balance, JIT inventory, Kanban and lean manufacturing.
After this unit you can
- Explain inventory functions and costs and apply ABC and VED analysis
- Apply EOQ and P- and Q-system controls
- Explain MRP, ERP and line of balance
- Explain JIT, Kanban and lean manufacturing
PTU syllabus topics
- Inventory functions and relevant costs
- ABC and VED analysis
- EOQ model
- P-System and Q-System inventory control
- introduction to MRP and ERP
- line of balance
- JIT inventory
- Kanban and lean manufacturing
Order when
Stock falls to the reorder point
At fixed time intervals
Order quantity
Fixed (EOQ)
Varies: up to a target level
Safety stock
Lower
Higher
Suits
Important A items
Many items from one supplier
Topic 1
Inventory functions
- Inventory: stock of items held for future use or sale — an asset that ties up capital.
Cycle stock
Ordering in lots for economies
Safety (buffer) stock
Protect against demand and lead-time uncertainty
Anticipation stock
Seasonal demand, promotions, price rises
Pipeline (in-transit) stock
Goods moving through the supply chain
Decoupling stock
Separate stages so each works independently
Hedge stock
Protect against price or supply shocks
Topic 2
Relevant inventory costs
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 model and ABC and VED 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 4
P-system and Q-system inventory control
Order quantity
Fixed (EOQ)
Variable — up to a target level
Timing
When stock falls to reorder point
At fixed intervals
Safety stock
Covers lead time
Covers review period plus lead time — higher
Monitoring
Continuous records
Periodic counts
Suits
Expensive, critical items (A class)
Many low-value items from one supplier
Target level
Demand over (review period + lead time) + safety stock
Order quantity
Target level − inventory position
Topic 5
Introduction to MRP and ERP
MRP calculates the quantity and timing of components needed to meet the master production schedule.
- 1Inputs
Master production schedule, bill of materials, inventory records
- 2Explode the BOM
Gross requirements for each component
- 3Net requirements
Gross requirements − on-hand − scheduled receipts
- 4Offset by lead time
Planned order releases
- 5Outputs
Purchase and production orders, reschedule notices
Example
A bicycle needs 2 wheels. To make 100 bicycles in week 6 with 40 wheels in stock and a 2-week lead time, net requirement = 200 − 40 = 160 wheels; release the order in week 4.
- MRP II extends to capacity, finance and marketing; ERP to the whole enterprise.
- ERP extends MRP II across finance, HR, sales and supply chain on one database.
Topic 6
Line of balance
- Line of balance (LOB): a control technique for repetitive production or projects comparing actual progress at key control points with the progress needed to meet delivery schedules.
- Elements: objective chart (cumulative planned vs actual deliveries), programme chart (operations with lead times), progress chart (status at each control point) and the line of balance drawn across it.
- Use: identifies which operations are behind and threaten future deliveries — used in defence, shipbuilding, housing.
Topic 7
JIT inventory and Kanban
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 8
Lean manufacturing
- Lean: maximise customer value while minimising waste (Toyota Production System; Womack and Jones).
- 1Specify value from the customer's view
- 2Map the value stream
- 3Create flow
- 4Establish pull
- 5Seek perfection (kaizen)
- Tools: value stream mapping, 5S, SMED (quick changeover), poka-yoke, kaizen, TPM, standard work, heijunka (level scheduling), andon.
Key terms
- Q-system
- Fixed order quantity at a reorder point
- P-system
- Periodic review to a target level
- Line of balance
- Technique comparing actual with required progress
- Value stream mapping
- Mapping material and information flows to spot waste
- SMED
- Single-minute exchange of dies
Quick revision
- Functions of inventory; relevant costs.
- EOQ; ABC, VED.
- Q vs P systems; formulas.
- MRP logic; MRP II; ERP; line of balance.
- JIT, Kanban; lean principles and tools.
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.State three functions of inventory.
- Q2.Distinguish Q-system and P-system.
- Q3.What is VED analysis?
- Q4.Name the inputs of MRP.
- Q5.What is a line of balance?
- Q6.Name the five lean principles.
Long-answer questions
- Q1.Explain inventory functions, costs and selective control techniques.
- Q2.Explain the EOQ model and P- and Q-system inventory control.
- Q3.Explain MRP, ERP and the line of balance technique.
- Q4.Explain JIT, Kanban and lean manufacturing.
Stuck on this unit?
Message SBS on WhatsApp for help with Production Planning and Control, or to ask about studying MBA at Synetic.