The chief executive of Punjab Machinery Company is worried about large inventories of raw materials and asks a management trainee to develop a sound inventory policy. The trainee analyzes inventory levels and costs of various steel rods used in milling machines. Inventories of some items are in excess while others are in short supply. The trainee needs to classify items using ABC analysis and recommend ordering policies and remedial measures.
The chief executive of Punjab Machinery Company is worried about large inventories of raw materials and asks a management trainee to develop a sound inventory policy. The trainee analyzes inventory levels and costs of various steel rods used in milling machines. Inventories of some items are in excess while others are in short supply. The trainee needs to classify items using ABC analysis and recommend ordering policies and remedial measures.
The chief executive of Punjab Machinery Company is worried about large inventories of raw materials and asks a management trainee to develop a sound inventory policy. The trainee analyzes inventory levels and costs of various steel rods used in milling machines. Inventories of some items are in excess while others are in short supply. The trainee needs to classify items using ABC analysis and recommend ordering policies and remedial measures.
The chief executive of Punjab Machinery Company is worried about large inventories of raw materials and asks a management trainee to develop a sound inventory policy. The trainee analyzes inventory levels and costs of various steel rods used in milling machines. Inventories of some items are in excess while others are in short supply. The trainee needs to classify items using ABC analysis and recommend ordering policies and remedial measures.
In September 1997, the chief executive, manufacturing division of Punjab Machinery
Company (PM), was worried about the large stocks of raw materials in the manufacturing unit. He wanted to make sure that inventories were at the optimum level. He, therefore, asked a recently employed management trainee to look into the matter and suggest suitable measures for a sound inventory policy. PM manufactured milling machines, radial drilling machines, and industrial humidifiers. Since it had originally been a trading organization, the company was well acquainted with the market for each of its products, including their sales trends and profit margins. Based on forecasts, the company set the production targets for the milling machines for the years September 1997 to June 2001 as shown in Exhibit 1. Average monthly milling machine production during the fiscal year 1997 98 was nine units. Mr. N.R. Kulkarni, the management trainee, decided to tackle the problem of materials and parts for the milling machine first. Then he planned to take up the problem of radial drilling machines and humidifiers. He obtained the stock position of various items of raw materials, the value of the stock, the quantity required per milling machine, etc., from records kept in the manufacturing unit. From these he calculated the cost of the different kinds of materials required for each milling machine. These particulars are given in Exhibit 3. (Not included are figures for purchase of components and certain other types of raw materials in all numbering over 400 items). The materials listed in Exhibit 3 were those needed for the milling machines only, although a few items were also used on the radial drilling machines. The existing purchasing procedures and inventory system are described below: Once a year the plant manager of PM, on the advice of his store-keeper, placed an order with the purchasing officer (stationed at the head office) for purchase of raw materials and parts. The head office was in a big city located about 300 km from the factory. The order contained a long list of all items to be procured, and the estimated quantity required for the following year. Generally, the plant manager did not worry about the stock on hand and estimated on the high side, to play safe. From this point on, the production manager had little contact with purchasing. The purchasing agent immediately placed the necessary orders and sent the material to the factory as it arrived. In the two years since the company had started manufacturing the milling machines, there had not been a single occasion when production had to be stopped due to a shortage of materials or parts. The purchasing officer and his staff bought materials not only for the manufacturing unit, but also for the sales offices and for sister concerns of PM. A typist clerk in the purchasing office spent nearly 50 per cent of his time placing orders for materials and parts required by the manufacturing unit; the rest of his time was spent in connection with purchasing items for the other units and in clerical activities not connected with purchasing. The purchasing officer spent about 10 per cent of his time locating suppliers, placing orders, and following-up. His steno-secretary spent about 20 percent of his time handling correspondence with suppliers, filing papers, etc., in connection with the purchases for the factory. The gross monthly salaries drawn by the purchasing officer, his steno-secretary, and the typist clerk were Rs. 9000, Rs. 4000 and Rs. 3000. The total workload of these three
persons was such that they had little unutilized time at their disposal. Expenses for stationery, telephone calls, and some visits to suppliers offices averaged roughly Re. 10 per order. Approximately 200 orders were placed on an average per year for materials and parts connected with the milling machine alone. Most of the items, including the EN-24 and EN-1A steel rods, were actually imported materials, but available ex-stock from different dealers / stockists. When certain sizes of bars were scarce, the purchasing officer had to pay higher prices. Also, he had often to place orders with several people for the supply of the same material, since he could not get all he required from one supplier. After the materials and parts were purchased, they were sent to the factory by trucks and the transport cost was roughly fifty paise per kg or Rs. 2000 for one full truckload of five tonnes. The castings required for the factory were obtained from the foundry of a sister concern located within a kilometer of PM. Mr. Kulkarni, in trying to evolve a suitable inventory policy, obtained information from the purchasing officer about availability of and lead times for the various materials. The purchasing officer based this information upon his past experience. These data are reproduced in column 8 in Exhibit 2. Mr. Kulkarni also learned from the financial controller at the head office that PM borrowed money from its bankers at an interest rate of 10 per cent. After a preliminary study of date in Exhibit 3, Mr. Kulkarni thought that it would be useful to know the average hourly cost of running a lathe. These figures supplied to him as cost per machine hour, were as follows: 1. Direct labour charges 2. Power, oil, coolant, consumable tools, spares, repairs, etc. 3. Depreciation, shop and other fixed overheads TOTAL
He also obtained the information contained in Exhibit 2.
Questions 1. What is the major problem faced by the company? 2. Analyze the data and identify the items for which inventory is in excess and those which are in short supply. 3. Classify the items using ABC analysis. 4. Recommend suitable ordering policies for the various items. 5. Suggest remedial measures for short-term and long-term.
Exhibit 1 PUNJAB MACHINERY COMPANY (C) Production Targets
Production target (No. of machines)
Type of machine tool 1997-1998 Sept.- June Milling machines
90
July to June 1998-99
1999-2000
135
175
2000-2001 180
2001-2002 180
Exhibit 2 PUNJAB MACHINERY COMPANY (C)
Machining data Speed* Feed** Depth of cut***
Rough cuts on type A steel
80-100 surface feet per minute 0.020 inches per revolution 0.125 inches
* In a lathe, this a measure of the speed at which the workpiece is turning. If the material diameter is 1 foot, then, with every revolution D =3.14 ft of surface pass the cutting tool. If the speed is 100, this means 100 / 3.14= 31.8 R.P. M is the machine setting. ** Each time the workpiece revolves; the tool moves a horizontal distance of .020 inches. Therefore, in the above example, 0.02 x 31.8 = 0.636 inches of the length of the bar would be traversed by the tool in one minute. *** The tool cuts to a depth of 0.125 inch, thereby reducing the diameter of the bar by 0.250 inch for every tool setting.
Exhibit 3:
PUNJAB MACHINERY COMPANY (C)
Particulars of EN-24 Steel Required for Milling Machines
45 mm dia 50 mm dia 55 mm dia 60 mm dia 65 mm dia 70 mm dia 73 mm dia 75 mm dia 80 mm dia 83 mm dia 85 mm dia 90 mm dia 95 mm dia 100 mm dia 105 mm dia 115 mm dia 120 mm dia 125 mm dia 132 mm dia 140 mm dia 150 mm dia 180 mm dia
Lead Cost of time for material material per to arrive machine at the factory** 14 7 days 7 2 months 2 6 weeks 55 2 months 8 2 months 11 2 months 53 2 months 7 1 month 42 2 months 18 7 days 29 1 month 52 1 month 10 1 month 103 1 month 38 1 month 133 2 weeks 47 6 weeks 12 2 weeks 3 4 weeks 30 4 weeks 9 4 weeks 10 6 weeks
*Average price paid during 1st year of operation. Prices might vary by as much as 50 percent up or 20 per cent down at any one time, depending on the availability of a particular size. EN- 24 steel was improved. Generally, scrap could be sold at 30 per cent of the purchase cost bar stock. **Average procurement times during 1st year of operation. However, it was believed that procurement would, normally, not exceed 9 months for any item, nor be less than one week, with six weeks as the most likely time for any one size at any point in time. Materials were not available locally but were available outside the city.
