Chapter 3

Material Requirement Planning

and Inventory Control

chapter highlights

☞☞ Material Requirement Planning ☞☞ Inventory Control

☞☞ Objectives of MRP ☞☞ Economic Batch Production
☞☞ JIT Philosophy (Just in time) ☞☞ Expression for Total Cost
☞☞ Push and Pull Systems ☞☞ Lead Time and Re – Order Level
☞☞ Unit Scheduling System ☞☞ Periodic Review System

Material Requirement Planning of gear wheels. But the gear box itself is a component item
when a large equipment assembly is considered.
Material requirement planning (MRP) is the technique of
determining the quantity and timing to acquire the materi-
als demanded by the master schedule. A master schedule is Lot Size
the expression of production plan into specific products and It is the quantity of an item procured as a lot as per an order.
their requirements and it also specifies the time required for Lot size is used in a wider sense. Lot sizing is the process of
their acquisition. specifying the order size.
Similarly, as indicated by the master schedule, it is
required to determine the capacity in terms of man power Time Phasing
and in terms of machine capacity to meet the produc- It is the process of scheduling in such a way that we receive
tion objective. The technique of determining the capacity the required quantity of the material exactly at the time we
required is known as the capacity requirement planning. require it. It can also be the process of scheduling such that
we produce a certain amount of material required exactly
Explanation of Terms in MRP at the time of its requirement – it cannot be before or after.
Dependent Demand Explosion of Requirement
It is the demand of a particular item which stems out from It is the process of breaking down of the parent item to com-
the demand of a complete unit, this item being a part of ponents so that a detailed effective planning of the material
that unit. In MRP, we plan for the acquisition of dependent requirement can be done.
demand items as required by the master schedule.
Bill of Material
Parent Items and Component Items
Bill of material (BOM) is the list of all components going
When the basic parts are assembled together, we get a parent into the assembly. The list specifies the part numbers of the
item. For the parent item, the parts are the component items. components and the number of components required for the
The parent unit can be a component item for a large assem- assembly. Bill of material totally specifies the item.
bly. For example, a gear box is the assembly of a number
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.915

Objectives of MRP the end. In this case, there is no queuing up. The work in a
process inventory will be very minimum.
Reduction of Inventory ‘Kanban’ is an integral part of the JIT system. It is an
MRP reduces the excessive build up of an inventory. MRP instruction card designed to produce what exactly is needed
determines how many components are required, and at what at the end. This system initiates the pull. It is a demand
time they are required to meet the master schedule require- feeding process. Each preceding process will produce only
ments. If it is properly planned, then almost a correct quan- that many items as have been withdrawn. The withdrawal
tity of the material is procured and therefore, the inventory of material from the preceding process and the production
built up is reduced. of items to replace it is ordered through a withdrawal and
production Kanban (marker card).
Reduction of Manufacturing and Delivery
Lead Time
Solved Examples
MRP reduces the delay in production, as it identifies the
material required and takes appropriate steps to get it at the Example 1: The process of fixing the sequence of opera-
right time. So, the production is not suffered. It fixes the pri- tion and material flow is
orities in production and delivery. It also fixes the dates for (A) master scheduling (B) routing
the arrival of delivery of materials and products. (C) scheduling (D) expediting.

Realistic Commitments Solution:

With a good system of MRP, the production department can Example 2: ‘Kanban’ is used to
give timely information to the marketing department so that (A) schedule production
the commitments can be observed, and a better customer (B) determine the optimum path for material movement
relation can be maintained. (C) request for production or withdrawal of parts
(D) decide the manpower requirement.
Increased Efficiency
MRP maintains good co-ordination among the work centres. Solution:
Therefore, uninterrupted flow of material occurs and there- It is an information of production and withdrawal of items.
fore, capacity utilisation and system efficiency improves. Example 3: The unidirectional flow of work so that all the
jobs are subjected to processing in the same order is known as
JIT Philosophy (Just in time) (A) flow shop (B) job shop
It is a philosophy of manufacturing, which aims at having (C) sequencing (D) routing.
zero – inventory. The philosophy is ‘right part at the right Solution:
time in right quantity’. JIT is a philosophy working in the The difference between flow shop and job shop is that in flow
manufacturing process. The following aspects are the char- shop, the routing of all jobs through the system is unidirectional.
acteristics of JIT: But in job shop, the routing may follow any path.
1. Planned elimination of all wastes. Example 4: The average number of jobs in the processing
2. Sustained improvement of productivity. system is known as
3. Execution of all production activities (all stages of (A) mean lateness (B) mean tardiness
conversion from raw material to the finished product). (C) in process inventory (D) mean process flow.
Solution:
Push and Pull Systems
Example 5: The most suitable forecasting technique suited
Push system is the conventional manufacturing system. It
for planning in long range is
does not permit queuing up in front of a work centre.
(A) regression analysis (B) moving average
(C) time series analysis (D) delphi method.
A B
Solution: (D)

Consider two work centres A and B. Let ‘A’ be faster Unit Scheduling System
than B. Then, the products and materials queue up, before Job shop scheduling is a unit scheduling system. We may
B. To avoid queuing up, A is decelerated to synchronise with have to process varieties of jobs on different machines.
B. This is the push system. In the pull system, we pull the The plan for production can be done only after receiving
process from the end point. What is demanded at the end the order. Scheduling is to be done in such a way that the
is carried out and accordingly, the process is pulled from
3.916 | Part III • Unit 8 • Industrial Engineering

available resources are optimally used. Some of the popular Job 5 4 6 8 1 3 7 2

methods of job shop scheduling are as given below: Processing time (hrs) 8 9 10 11 12 13 14 18
Weightage 1 1 3 2 1 1 2 2
Shortest Processing Time (SPT)
Flow time 8 17 27 38 50 63 77 95
According to this method, the job having the shortest pro-
cessing time is processed first. This is done to avoid queuing Weighted flow time 8 17 81 76 50 63 154 190
up of the jobs.
Solution:
Earliest Due Date (EDD) Flow time = 8 + 17 + 81 + 76 + 50 + 63 + 154 + 190
= 639.
In this case, processing is done according to their ascending
order of the availability of time before the due date. Doing Total flow time
Mean flow time =
so, we can keep up the commitments of the delivery dates. Total of weightage
639
First in First Out (FIFO) = = 49.15 min. 
13
In this case, the processing is done as they come in. The job
which comes first, is served first. Example 8: In a work shop, a cost of H50 is incurred for
each day for a job. The workshop receives six jobs on a day
Last Come First Served (LIFO) with the following details:
In this case, the job which comes last is served first. When a
job piles up, the job at the top will be that which came last. It Job 1 2 3 4 5 6
is served first. Processing time (days) 6 4 7 2 9 3
Due dates 16 12 20 4 27 7
Example 6: Five jobs have come on a machine. The pro-
cessing time of each of the job is as given below:
The minimum total cost is (H)
Job 1 2 3 4 5 (A) 4800  (B) 4200  (C) 4000  (D) 3600.
Processing time (hrs) 30 7 9 28 15
Solution:
The minimum mean flow time is The cost becomes minimum when the jobs are completed
(A) 40.4 hrs (B) 43.6 hrs and given off from the work shop as early as possible.
(B) 46.2 hrs (D) 48.5 hrs. Therefore, we have to schedule the jobs according to the
shortest processing time first. Accordingly, we have
NOTE
Flow time is the sum of the waiting time and the process- Processing Total Due
Job
ing time of each job. The average flow time will be least, time time date
when the processing is done according to the arrangement 4 2 2 4✓
with the shortest possible time first and then processing 6 3 5 7✓
according to the ascending order of the processing time. 2 4 9 12 ✓
1 6 15 1✓
Solution:
Arranging the jobs according to the ascending order of the 3 7 22 20 ✗
processing time. 5 9 31 27 ✗

Job 2 3 5 4 1 84

Processing time (hrs) 7 9 15 28 30

Time of completion 7 16 31 59 89
Job nos. 3 and 5 are delayed, all the other jobs are completed
before time.
7 + 16 + 31 + 59 + 89 Total number of days to be charged = 84
Mean flow time =
5 Cost = 84 × 50
= 40.4 hrs. = H4200.

Example 7: In a machine shop, eight jobs come for pro- Direction for questions 9 and 10:
cessing. The processing time for each job and the weightages
given to them are shown in the table. The minimum flow Job 1 2 3 4 5 6 7 8
time shall be Processing time 12 18 13 9 8 10 14 11
(A) 56.2  (B) 49.2  (C) 42.3  (D) 38.6. Weight 1 2 1 3 1 3 2 2
Arranging the job according to the ascending order of
the processing time.
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.917

A job shop has six orders at hand which are to be completed Processing Flow Due
Job Lateness
with one work centre. The processing time and the due dates time time date
are as shown. 2 8 8 10 -
Order 1 2 3 4 5 6 4 7 15 11 4
Processing time (days) 3 2 9 4 2 4 3 8 23 12 11
Due date 17 21 5 12 15 24 1 10 33 15 18
5 12 45 18 27
Example 9: Minimum average flow time is (days) 6 15 60 25 35
(A) 12.5 (B) 11.5 (C) 10.5 (D) 9.5.
7 18 78 30 48
Solution:
The sequence is 2 – 4 – 3 – 1 – 5 – 6 – 7.
Processing Flow Due
Order Lateness Example 12: The maximum lateness in the optimum ­sequence
time time date
(A) 32 (B) 27 (C) 48 (D) 90.
5 2 2 15 -
2 2 4 21 - Solution:
4 3 7 17 - From the table, it is clear that the maximum delay is 48. It
6 4 11 24 -
occurred in the case of job no. 7.
4 4 15 12 3 Direction for questions 13 and 14: In a work centre, the
3 9 24 5 19 number of jobs arriving in the system and their due dates
63 24 are given.
Job 1 2 3 4 5
(Arranging the orders according to the rule of shortest
processing time first) Processing time (days) 9 7 5 11 6
Due date (days) 16 20 25 15 40
63
Minimum flow time = = 10.5.
6 Example 13: As per the ‘shortest processing time’ crite-
Example 10: Total tardiness (days) rion, the average number of jobs in the system is
(A) 17 days (B) 12 days (C) 5 days (D) 22 days. (A) 3.4 (B) 3.2 (C) 2.6 (D) 1.8.
Arranging according to SPT,
Solution:
Tardiness means lateness. Processing Flow Due Job
Job
Two of the jobs are delayed. time time date lateness
No. of days of delay = 3 + 19 = 22 days. 3 5 5 25 0
Direction for questions 11 and 12: Scheduling of jobs on 5 6 11 40 0
a single machine is to be done. The processing time of each 2 7 18 20 0
job and their due dates are given below. 1 9 27 16 11
4 11 38 15 23
Job 1 2 3 4 5 6 7
38 99 34
Processing time 10 8 8 7 12 15 18
Due date 15 10 12 11 18 25 30
Solution:
Example 11: The optimal sequence which will minimise Total flow time = 99
the maximum lateness is Average no. of jobs in the system is
(A) 2 – 4 – 3 – 1 – 5 – 6 – 7
Total flow time 99
(B) 2 – 3 – 1 – 4 – 6 – 5 – 7 =
(C) 2 – 4 – 1 – 5 – 6 – 7 – 3 Total completion time 38
(D) 3 – 1 – 4 – 5 – 7 – 6 – 2. = 2.6.
Solution: Example 14: Average lateness in the system.
The minimum value of maximum lateness can be obtained by (A) 9.2 days (B) 8.6 days (C) 7.5 days (D) 6.8 days.
arranging the jobs according to the earliest due date (EDD). Solution:
Job 2 4 3 1 5 6 7 Total lateness = 34 days.
Processing time 8 7 8 10 12 15 18 34
Average lateness = = 6.8 days.
Due date 10 11 12 15 18 25 30 5
3.918 | Part III • Unit 8 • Industrial Engineering

Direction for questions 15 and 16: In a job centre, there Direct inventories are those materials that become the
are six jobs at hand. The jobs, their processing time and due integral part of the final product. The raw material, semi–
dates are as shown in the chart: finished goods etc. are direct inventories whereas, fuel,
cleaning agents, lubricants etc. are indirect inventories.
Job 1 2 3 4 5 6
Inventory control is a planned scientific approach by
Processing time 8 6 9 7 4 5 which we decide when to purchase, how much to purchase
Due date 10 12 20 32 36 40 and how much to store so that the cost is minimum. At the
same time, there should be no interruption in the process of
Example 15: As per the ‘earliest due date’ criterion, the production.
average number of jobs in the system is
(A) 4.2 days (B) 3.8 days (C) 3.2 days (D) 2.9 days. Purpose of Inventory Control
Solution: •• During fluctuating demand, the inventory helps in main-
Arranging the jobs as per the earliest due date (EDD), taining economy by absorbing the fluctuations.
•• It helps in smooth and efficient running of an organisation.
•• Service is provided at short notice when an inventory is
Processing Flow Due
Job
time time date
Lateness maintained.
•• When there are shop rejections or delay in the raw materi-
1 8 8 10 -
als, it acts as a buffer stock.
2 6 14 12 2
•• Product cost is reduced because of long, uninterrupted
3 9 23 20 3 production runs and batching.
4 7 30 32 - •• Because of the inventory, bulk purchases can be met and
5 4 34 36 - the clerical cost be reduced.
6 5 39 40 -
In the case of raw material inventory, the basic question
39 148 5 is (a) when should the order be placed for the material?
(b) how much should be procured through the order?
Total flow time = 148
Total completion time = 39 Costs Associated with Inventory
148
Number of jobs at hand = = 3.8 days. There are two costs associated with an inventory. When
39 we are trying to reduce one cost, the other cost increases.
Example 16: Average job lateness is Therefore, we have to strike a balance between these
(A) 0.83 days (B) 1.6 days (C) 3.2 days (D) 4.1 days. costs. Therefore, inventory control becomes an operations
research problem.
Solution: The costs are:
Total lateness Holding Cost or Inventory Carrying Cost
Average lateness=
Number of jobs
This is the cost involved in keeping the goods in the store.
5 When there is an under stock, we have to see that it is main-
= 0.83 days. tained properly, (according to its nature), so that it will be
6
available at a required quality at the time of requirement.
Inventory Control Moreover, the holding cost depends on its size and the
time for which it is to be stored. It indicates the space and
Inventory may be defined as the quantity of economic
time that we should have to maintain it. It involves cost.
resources (goods) stored at any point of time or remaining
Generally, holding cost includes the following:
idle at any point of time. The variables in inventory control
are: 1. Storage cost
2. Handling cost
1. Raw materials
3. Depreciation cost
2. Semi finished goods
4. Rent and capital cost
3. Finished products
5. Administrative cost etc.
4. Machinery
5. Fixtures and furniture etc. Ordering Cost (Set Up Cost)
Inventories are broadly classified in to: This is the sum of the various costs involved in placing the
1. Direct inventory order for a material. All the purchase formalities are cost –
2. Indirect inventory. involved. It includes
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.919

1. The cost of placing an order Variables in Inventory Control

2. The cost of transportation There are two types of variables in inventory control:
3. The cost of inspection
4. The cost of checking supplies 1. Controllable variables and
5. The advertisement cost 2. Uncontrollable variables
6. The cost of communication
7. Cost of stationary etc.
Controllable Variables
These are the variables which can be controlled separately
It can be seen that if the quantity purchased per order is or in combination.
more, the number of orders to be placed within a specified
time frame will be less. Consequently, ordering cost will 1. How much to procure?
decrease. Because ordering cost is directly proportional to The quantity to be ordered to raise the available stock
the number of orders, more quantity of the material arrives by a prescribed level and in a particular order can be
at the stores at a time; the inventory carrying cost will be controlled.
high. 2. When to order?
On the other hand, if the quantity ordered per order is The inventory is replenished when the stock is equal to or
less, more number of orders are to be placed in a specified below the prescribed quantity or at every time interval.
time. When the number of orders is more, the ordering cost 3. Completion of stocked items:
will be high. But, as the number of units arriving in the store To meet the demand, having more quantity of the
per order is less, the inventory carrying cost will be less, in finished goods maintains less delay. But more the
this case. stock, higher is the inventory holding cost; less the
stock, more is the delay in meeting the demand.

Uncontrollable Variables
Total cost (C)

1. Various costs involved in inventory control:

Carrying cost (B) (a) Holding costs
(b) Shortage costs
(c) Setup costs.
Cost

2. Demand: The demand pattern may be deterministic

or probabilistic. In deterministic models, the quantity
required for a fixed period of time is known exactly.
Ordering cost (A)
The known demand maybe fixed or variable.
Ordered quantity
Static inventory model Models with known demand which
is fixed over a period of time are called static inventory
models.
In the graph shown above, ‘A’ indicates the ordering cost
which increases as the number of orders increase. At the Dynamic inventory model Models with known demand
same time, as the number of orders increase, because the which vary with time are called dynamic inventory models.
quantity procured per order is less, the inventory carrying In the probabilistic model, demand over a certain period
cost (curve B) decreases. of time is known with a certain probability, but the pattern
The other costs are purchase costs and shortage costs or is described by a known probability distribution. It can be
stock-out costs. Purchase cost is the price paid for produc- stationary or non-stationary over a period of time.
ing/purchasing the item. Shortage costs or stock out costs 3. Lead time: When the demand is deterministic and the
are the costs incurred when there is a delay in meeting the lead time is known, then the order should be placed
demand or an inability to meet it at all. in advance by an amount equal to the lead time. If the
∴ Total variable cost = carrying cost + ordering cost + lead time is zero, then the replenishment of stock is
shortage cost. instantaneous and there will be no need to order in
If the unit cost is dependent on the quantity purchased, advance. When the demand or lead time are known
then the total variable inventory cost will be with a probability, then the amount and the time of
Total variable inventory cost = purchase cost + carrying replenishment are found by using expected costs of
cost + ordering cost + shortage cost. holding and shortage.
In inventory management, the best policy corresponds 4. Supply of goods: The supply of goods may vary around
to the minimum total cost (curve C). Corresponding to the the quantity of the goods ordered. The amount procured
minimum total cost, the quantity purchased per order is may vary with a known probability density function.
known as the Economic Order Quantity (EOQ).
3.920 | Part III • Unit 8 • Industrial Engineering

It is difficult to have a single model to evaluate the The minimum average cost per unit time is
inventory costs and quantities which take into account
all the variations. Therefore, inventory models are classi- Co = 2C1C2 r .
fied into two major categories on the basis of demand i.e., The total minimum cost per unit time, where C is the cost
deterministic models and probabilistic models. The other per unit of the item is
categories are models with price breaks and models with
restrictions. = 2C1C2 r + Cr.

Deterministic Model I(a) Deterministic Model I(b)

In this model, the demand rate is uniform, lead time is zero In this model, the demand rate is non-uniform, lead time
i.e., the replenishment time of items is negligible and short- is zero and shortages are not allowed. As there is a non-­
ages are not allowed. Let r be the uniform demand rate at uniform demand rate instead of the demand rate, the total
which the goods are supplied to the customers. If the orders demand D for some long time T is given.
are placed at time intervals t of quantity q, then the quantity
q is given by q = rt in each order. In a small time dt, the
Inventory
stock is rt dt, the stock for the time period t is q q q q
q
t
1 1
∫ rt dt = 2 rt 2 = 2 qt (area of triangle OAP)
0

Time
Inventory
t1 t2 t3 t4 t5
P T

q = rt
The total time period T is given as the sum of the time
intervals t1, t2, ….. tn.
Time Holding cost for time period T is
O A
t
⎛1 ⎞ ⎛1 ⎞ ⎛1 ⎞ ⎛1 ⎞
⎜⎝ qt1 ⎟⎠ C2 + ⎜⎝ qt 2 ⎟⎠ C2 + ⎜⎝ qt3 ⎟⎠ C2 + …. + ⎜⎝ qt n ⎟⎠ C2
2 2 2 2
C2 = inventory holding cost of one unit per unit time. 1
= qC2 (t1 + t 2 + …t n )
C1 = ordering cost per order. 2
1 1
∴ Inventory holding cost during time t = C2 R t2 = qTC2
­ordering cost per order = C 2 2
1
D
1 Ordereing cost = N .C1 = C1 ⋅
∴ Total cost during time t = C Rt2 + C1 q
2 2
∴ Average total cost per unit time 1 D
∴ Total cost = qC2T + C1
1 2 q
C(t) = C2 Rt2 + C1
2 2C1 ( D /T )
The optimum lot size = qo =
∴ The optimum time interval to place an order is C2
2C1
to = Minimum total cost = 2C1C2 ( D /T )
C2 r
Deterministic Model 1(c)
By multiplying with r, we get the optimum quantity to
order during each order. In this model, the demand rate is uniform, lead time is not
zero i.e., the production rate is finite and shortages are not
2C1r allowed. The production rate should be higher than the con-
∴ qo = r to =
C2 sumption rate to provide an inventory.
r = number of units consumed per unit time
where, qo is called the optimum lot size or economic
k = number of units produced per unit time
order quantity.
C1 = ordering cost
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.921

C2 = inventory holding cost per item per unit time. procurement of raw materials. Often, the quantity produced
q = rt = number of items produced per run exceeds the quantity which can be sold. Therefore, the opti-
t = interval between runs. mum lot size that is to be produced in one batch is to be
determined. It is known as economic lot size or economic
Inventory batch size.
Economic batch size is also given by the formula

2C1r
Slope r Slope k − r Q=
q C2
Im
where, C1 represents the set up cost. It is the cost of set
Time up to be made for one batch production.
t1 t2 t3 C2 = inventory carrying cost per unit per year and r = the
T annual anticipated demand for the quantity produced.
Example 17: A company manufactures a product which
t1 is the time taken to build up the stock with a constant has a monthly demand of 4000 units. The product requires a
rate k – r and t2 is the time taken to consume the stock dur- component ‘A’ priced H20. Every product requires one unit
ing which there is no production rate and the inventory of ‘A’. The ordering cost for the component is H120/order
decreases at a constant demand rate r. and the holding cost is 10%/annum/unit.
Im is the maximum inventory at the end of time t1. The economic order quantity is
(A) 2400 units (B) 2600 units
∴ Im = (k – r)t1 (C) 3200 units (D) 3600 units.
Total quantity produced during t1 is q and quantity con-
sumed during t1 is rt1. Solution:
Given, demand (r) = 4000 monthly = 4000 × 12 annually
⎛ rI ⎞ Ordering cost = H120.
∴ I m = q − rt = q − ⎜ m ⎟
⎝ k − r⎠ Inventory carrying cost is 10% of 20 = H2.
⎛ k − r⎞ 2 × 120 × 4000 × 12
∴ Im = ⎜ q.
⎝ k ⎟⎠ ∴ EOQ =
2
1
Total cost per unit time C(Im, t) = I .C + ⎛ C1 ⎞ = 144 × 40000
2 m 2 ⎜⎝ t ⎟⎠
= 12 × 200 = 2400 units.
1⎛k −r ⎞ ⎛C ⎞ Direction for questions 18 to 20: A firm has a monthly
∴ C ( q, t ) = ⎜ ⋅ q⎟ C 2 + ⎜ 1 ⎟
2⎝ k ⎠ ⎝ t ⎠ demand for a material equal to 5000 units. The ordering
cost is evaluated to be H225/order. The inventory carrying
1 ⎛ k − r⎞ C1r
= ⎜⎝ ⎟⎠ C2 .q + cost is 5% of the unit price of the material. Unit price of the
2 k t material is H60.
2C1 rk Example 18: The EOQ is
Optimum lot size = qo = .
C2 k − r (A) 2600 units (B) 3000 units
(C) 3200 units (D) 3600 units
k −r
Optimum average cost/unit time = Co = . 2C1 C2 r
k Solution:
NOTE 2C1r
EOQ =
C2
When k = r, Co = 0 ⇒ no holding cost and no set-up cost.
When k = ∞ ⇒ production rate is infinite i.e., model 1(a) r = 5000 × 12 = 60000
C1 = H225/order
Economic Batch Production C2 =
5
× 60 = H3.
Production managers have to decide very often what quan- 100
tity of the product must be produced, against the demand.
2 × 225 × 5000 × 12
If large quantities are produced and they are not sold out ∴ EOQ =
immediately, the task of holding the inventory in the store 3
arises. Therefore, a similar situation arises in the case of = 20000 × 225 × 2
production of goods as well, which is identical to that of the
3.922 | Part III • Unit 8 • Industrial Engineering

= 40000 × 225 Expression for Total Cost

= 200 × 15 Ordering cost =
r
C1 when q is EOQ, r is the annual demand
= 3000 units. q q
and C1 the ordering cost. Inventory carrying cost is .C2
Example 19: If instead, the firm decides to procure 4000 2
r q
units/order, the additional cost for the company is Total cost = C1 + C2
q 2
(A) H675 (B) H520 (C) H450 (D) H375.
Solution: 2C1r
where q =
If the purchased quantity is 4000/order. C2
60000
Number of orders per annum = = 15 . 2C1r
4000
rC1 C2
∴ Ordering cost = 15 × 225 = H3375. Total cost = + × C2
2C1r 2
4000
Inventory carrying cost = ×3 C2
2
12000 r C2 C1 2C1r
= = 6000. = + × C2
2 2C1r 2 C2
Total cost = 6000 + 3375 = 9375. rC1C2 2C1C2 r
Total cost in the case of EOQ: = +
2 2
60000
Number of orders = = 20 orders.
3000 2C1C2 r 2C1C2 r
= +
Ordering cost = 20 × 225 = 4500. 2 2
3000 Total cost = 2C1C2 r
Inventory carrying cost = ×3
2
= 4500. Example 22: A manufacturer has to supply at the rate of
Total cost = 4500 + 4500 = 9000. 1000 units/year. Shortage is not allowed. The storage cost is
Additional cost = H375. H0.80/unit/year. The set up cost per run of production is H80.
The minimum average yearly inventory cost is (H)
Example 20: The minimum carrying cost the company has
(A) 240 (B) 280 (C) 290 (D) 360.
to incur (H)
(A) 2450 (B) 2800 (C) 3600 (D) 4500. Solution:
Solution: The total cost is 2C1C2 r
The minimum carrying cost is that which corresponds to
EOQ = 2 × 80 × 0.8 × 1000
i.e., = H4500. It depends on the size of the inventory. ≈ 360.

Example 21: A company has an annual demand of 400 Direction for examples 23 to 25: A company requires 1500
units of a product. The ordering cost per order is H50. The items/month at a price of H27. The ordering cost is H200 and
cost per item is H10 and the carrying cost is 15% of the unit the inventory carrying cost is 20% of the average inventory.
cost of the item. The total minimum cost is Example 23: The economic order quantity is
(A) H523 (B) H416 (C) H380 (D) H245. (A) 1155 (B) 1276 (C) 1315 (D) 1385.
Solution: Solution:
The total cost can be directly found from the formula Annual demand = 1500 × 12.
= 2rC1C2 Ordering cost C1 = 200.
Ordering cost C1 = 50. Inventory carrying cost is 20% of 27.
Inventory carrying cost = 15% of H10 Average inventory of 20% is the same as 20% of the unit cost.
= H1.5. ∴ Inventory carrying cost = H5.4.

∴ Total cost = 2 × 400 × 50 × 1.5 2 × 200 × 18000

∴ EOQ =
5.4
= 800 × 50 × 1.5
= 1155 units.
800 × 75 = H 245.
Example 24: The number of orders per year is
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.923

(A) 12 (B) 14 (C) 16 (D) 18. Direction for questions 26 to 28: An inventory problem is
as given below. Annual demand for a product = 36000.
Solution:
Cost/unit = H1
Annual demand is 18000 units.
Ordering cost = H25/order
EOQ = 1155.
Lead time = 15 days
18000 18000 Store charge = 5% of unit cost
∴ Number of orders = ≈ 16 orders. ≈ ≈ 16 orders.
1155 1155 Cost capital = 15%
Safety stock – one month’s consumption.
Example 25: If 1400 numbers are procured at a time the
company can avail a discount of 2% in the price. If the Example 26: The EOQ is (units)
company goes for the option of purchasing 1400 nos./order (A) 2500 (B) 2800 (C) 3000 (D) 3500.
avoiding EOQ, then the saving for the company is
(A) H11000 (B) H9604 (C) H8980 (D) H8430. Solution:

Solution: 2C1r 2 × 25 × 36000

EOQ = =
The total cost if the purchase is made according to C2 C2
EOQ is 2C1C2 r.
C2 = (0.15 + 0.05)1
TC = 2 × 200 × 5.4 × 18000 = 6235.38.
Total purchase cost = H6235.38 + 27 ×18000 = H492235.38. = 0.2
If procured at the rate of 1400 numbers/order, 2 × 25 × 36000
EOQ =
0.2
18000 ⎛ 1400 ⎞
total purchase cost = × 200 + ⎜ 5.4 = 3000 units.
1400 ⎝ 2 ⎟⎠
+27 × 0.98 × 18000 Example 27: The safety stock is
(A) 3000 (B) 3200 (C) 3800 (D) 4200.
= 2571.42 + 3780 + 476280 = 6351.42 + 476280.
Solution:
Total cost = 482, 631.42. Safety stock is one month’s consumption.
The saving is H9604.
36000
Number of orders = = 12.
3000
Lead Time and Re – Order Level ∴ EOQ is one month’s consumption = 3000.
Usually when an order is placed, it may take some time to
Example 28: Re – order level is
receive the item. The time between the placement of order
(A) 5200 units (B) 4500 units
and the actual receipt of the item is known as the lead time.
(C) 400 units (D) 3500 units.
In most of the cases, lead time cannot be exactly known; it
is probabilistic. If it is deterministic, the order can be placed Solution:
in advance just to take care of the lead time consumption. Re – order level = lead time consumption + buffer stock.
Then, there will not be any shortage for the item. 1
At what stock of the item is it essential to initiate the =
× 3000 + 3000
2
purchase procedures is known as re – order level. Re – order
level means the stock that is required to take care of the lead = 4500 units.
 
time demand. Shortage Cost
∴ ROL = average consumption × lead time. If there is a delay in meeting the demand or inability to
undertake production due to shortage, then there are penalty
During the lead time, sometimes there can be an unex-
costs. These costs include:
pected delay. Also in the lead time, there can be an addi-
tional demand arising. To take care of this, an additional 1. loss of future sales (due to loss of customers)
stock is to maintained. This is known as the safety stock or 2. extra cost due to emergency purchase
buffer stock. If the buffer stock is high, naturally the carry- 3. loss of good will.
ing cost will be high. But if the buffer stock is less, there
Let Cp be the penalty cost. The inventory carrying cost
can be a shortage. Therefore, it is desirable to strike a bal-
after accommodating the penalty cost because of shortage is
ance between these two.
Buffer stock = (maximum lead time – Minimum lead ⎛ Cp ⎞
time) × lead time rate of consumption. C2′ = C2 ⎜ ⎟
⎝ C2 + C p ⎠
3.924 | Part III • Unit 8 • Industrial Engineering

Deterministic Model 2(a) NOTE

This model allows shortages with uniform demand rate The optimum cost given by model (a) with no shortages
and zero lead time. Allowing shortages will increase the gives greater value than the minimum cost provided by
cycle time which decreases the total ordering cost over the model 2(b).
planned period. The inventory stock is also decreased which
results in lower inventory carrying cost. Quantity Discounts
Inventory The quantity to order from the supplier to replenish inven-
tory is an important decision in material/inventory manage-
ment. Economic order quantity (EOQ) model computes the
amount to order using the assumptions that the cost per unit
Im of purchased items remains fixed, regardless of the num-
q
ber of units ordered. But, it is common for the suppliers
t1 t2 to give discounts when order quantities are high. When
Time
t s discounts are considered, the economic order quantity may
change. The optional order quantity model investigates the
total annual inventory costs with and without discounts, and
Im = number of items that are available at the beginning of the optional order quantity is one that minimises the total
the inventory. annual inventory costs. The result is that larger than usual
q = number of items ordered in one order = rt economic order quantities may be justified.
r = demand rate Steps in quantity discount model:
CP = shortage cost
•• Compute EOQ for each quantity discount price.
The total time T = Nt, N is the number of orders.
•• Find whether the computed EOQ is in the discount range.
t = t1 + t2 •• If not, use lowest cost quantity in the discount range.
where, t1 is the time during which inventory items are •• Compute total cost for EOQ or lowest cost quantity in the
­consumed and t2 is the interval during which the demand discounted range.
is not met. •• Select quantity with the lowest total cost, including the
Using the similar triangles relation, cost of the items purchased.

t1 I m t 2 q − 1m
= and = Solved Examples
t q t q
Total cost during time t Direction (29, 30): The demand for an item is 25 numbers/
month. The set up cost for production is H30/batch. The
1 1
= I m t1C2 + ( q − I m ) t 2C p + C1 inventory carrying cost/unit/month is H1/2. The shortage
2 2 cost is evaluated to be H3/unit/month.
2C1r ⎛ C p + C2 ⎞ Example 29: Then EOQ is
Optimum lot size = qo =
C2 ⎜⎝ C p ⎟⎠ (A) 60 units (B) 75 units (C) 85 units (D) 95 units.
Solution:
Deterministic Model 2(b) ECQ =
2C1r
This model has similar conditions as model 2(a), but the ⎛ Cp ⎞
C2 ⎜ ⎟
time period t is variable. ⎝ C2 + C p ⎠
The optimum quantity per order is given by,
C1 = H30, r = 25 × 12 = 300/annum
2rC1 ⎛ C p + C2 ⎞ C2 = 0.5 × 12 = H6, Cp = H3
q=
C2 ⎜⎝ C p ⎟⎠
2 × 30 × 25 × 12
EOQ = = 95 units.
⎡ 3 ⎤
The re-order time t =
(
2C1 C p + C2 ) 6⎢
⎣ 6 + 3 ⎥⎦
rC2C p
Example 30: The time between two consecutive batch pro-
C2 ductions is
The minimum cost Cmin = 2C1C2 r (A) 1.5 months (B) 2 months
C p + C2
(C) 3 months (D) 4 months.
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.925

Solution:
1000 × 6000 6000 × 1000
300 = =
Number of batches per annum = ≈ 4 batches. ⎡ 5 ⎤ ⎡ 20 ⎤ 40 20
95 8⎢ ⎥ ⎢ ⎥ ×
⎣ 6 ⎦ ⎣ 28 ⎦ 6 28
1
Time between the batches = × 12 = 3 months.
4 6000
= = 1123.
Example 31: A firm has an annual demand for a product 2857
at the rate of 1000 units. The cost of ordering is H100/order.
The carrying cost is also H100/unit/year. The stock out cost In real situations, the probability distribution of future
is evaluated to be H300. Everytime, the item is out of stock. demand is usually determined rather than the exact demand
The quantity to be stocked (in units) is itself. The expected costs are obtained and minimised
(A) 68 (B) 61 (C) 52 (D) 46. instead of the actual costs.

Solution:
r = 1000 Probabilistic Model
C1 = 100 In this model, the demand is instantaneous, setup costs are
C2 = 100 zero, discrete stock levels and lead time are zero. The two
Penalty cost Cp = 300. types of costs involved are over-stocking cost and under-
The economic stock level is stocking cost.
Let r = discrete demand rate with probability Pr
2C1r Im = discrete stock level for the time interval t
=
⎧ Cp ⎫ t = constant interval between the orders
C2 ⎨ ⎬
⎩ Cp + C2 ⎭ Ch = unit carrying cost, S = selling price of the unit
C = cost price of the unit, V = salvage value
2 × 100 × 1000 2 × 100 × 1000 Co = over-stocking cost = C + Ch – V
= = Cu = under-stocking cost = S – C – Ch / 2 + Cs
⎧ 300 ⎫ 3
100 ⎨ ⎬ 100 × Cs = unit shortage cost.
⎩100 + 300 ⎭ 4
If any of the values is not given, it is taken as zero.
8 × 100 × 1000 8000
= =
300 3 Inventory

= 52 units. r ≤ Im
r
Example 32: In a manufacturing unit, the production rate
Im
of a commodity is 36000/annum; the annual demand is only
6000 units/annum. The set up cost for batch production is Im − r
H500. The inventory carrying cost/unit/year H8. The penal- Time
ty cost, if shortage occurs is H20. Then, the economic batch t
size of production is
(A) 1123 (B) 324 (C) 2510 (D) 937.
Solution: Inventory
As the demand is only 6000 units and the production rate is
36000 units, the carrying cost is applicable to 36000 – 6000
r > Im
units only. The corresponding batch size is, Im
r
2C1r Time
Q= r − Im
⎡ r ⎤ ⎡ Cp ⎤
C2 ⎢1 − ⎥ × ⎢ ⎥
⎣ p ⎦ ⎢⎣ C2 + C p ⎥⎦ t

2 × 500 × 6000
=
⎡ 6000 ⎤ ⎡ 20 ⎤ The two cases where the optimum inventory Im has to be
8 ⎢1 −
⎣ 36000 ⎥⎦ ⎢⎣ 20 + 8 ⎥⎦ determined are r ≤ Im and r > Im.
There are no shortages when r ≤ Im and shortages occur
when r > Im.
3.926 | Part III • Unit 8 • Industrial Engineering

The cumulative values of the probability distribution are Types of Inventory Control
determined and the ratio Cu /(Cu + Co) is determined. The
optimal order quantity Imo is calculated by computing.
Selective Inventory Control
In inventory management, some items are very important
Cu and given special attention on the basis of usage, lead
Pr ≤ I m −1 < < Pr ≤ I m
Cu + Co time, technical problems, costs involved etc. All items
of the inventory need not and cannot be controlled with
Safety Stock equal attention. For this reason, the Management gives
The excess stock maintained during the lead time demand is different items, different priorities for their control and
called as the safety or buffer or cushion stock. management.
1. ABC Analysis (always better control): It is based
Determination of Safety Stock on Pareto’s Law – A few high usage items constitute
•• Safety stock = (maximum lead time – normal lead time) a major part of the capital whereas, bulk of the items
× average demand. in an inventory having low usage value constitute
•• According to the standard deviation of the forecast error, insignificant part of the capital. The inventory items
safety stock = Z × standard deviation. are categorised into A, B and C categorises based on
•• Z is the value given by the service level. the usage value in monetary terms.
•• Mean absolute deviation (MAD) is also used to calculate
safety stock. Usage value Item no.
A 60 – 70% 10 – 20%
SS = safety stock = k.MAD
B 30 – 40% 40 – 50%
∏
where, k = service factor = ⋅Z C 10 – 20% 60 – 70%
2
2. VED (vital essential desirable): Items are categorised
∏
∴ SS = ⋅ Z ⋅ MAD. on the basis of the criticality of the inventory for the
2 production system.
Implications of Safety Stock 3. HML analysis (high medium low): The classification
of items is on the basis of the unit costs involved. It is
1. Safety stocks are used when the lead time of similar to ABC control.
manufacturing is too long and is difficult to meet the 4. SDE analysis (scare difficult easy): Classification of
customer demand. items is done according to the ease or difficulty of the
2. It is used as a buffer to protect the organisation when availability of the item.
there is a rise in the demand during the lead time. 5. S-OS analysis (seasonal-S, off seasonal-OS): Items
3. Increase in safety stock increases the inventory are classified according to the nature of availability of
holding cost. Therefore, it is necessary to have a the inventory items depending on seasonal demand/
minimum safety stock. availability.
4. Lean manufacturing, just in time methods, have the 6. XYZ analysis: Classification is done on the basis of
least amount of safety stocks. Enterprise resource closing inventory values. X items have high closing
planning also reduces the safety stock of an inventory values, Z items have a low value while Y
organisation. items have in-between value. This analysis helps to
reduce the capital investment in X items.
Service Level 7. FNSD analysis: Items are categorised on the basis
The amount of safety stock required is dependent on the of their consumption rate:
service level required by the organisation. A 98% service F – fast moving items (high consumption)
level means that the demand has a 2% of chance to exceed N – normal moving items
the re-order level during the lead time. Safety stock can be S – slow moving items
calculated as D – dead stock
safety stock = z. sx = 2.055 sx
Periodic Review System
z = 2.055 for 98% service level from the normal distribu-
tion tables. Two-bin System or Q-system or Perpetual
sx = Standard deviation of random demand during lead Inventory System
time (x). In this type of inventory control, a fixed size of the order
X = Expected demand during the lead time is placed whenever the depleting stock level of the item
∴ Re-order point = X + 2.055 sx. reaches the re-order level. The time interval between the
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.927

orders is not fixed, but the order quantity is fixed. This is The two types of periodic review systems commonly
named two-bin because it is divided into two bins, the first used are – Fixed order cycle system and sS system.
bin is from the receiving of goods to the placement of order
whereas, the second bin contains the stock required to meet Fixed Order Quantity System
the demand during the lead time. This system is based on These are the situations in which the demand is assumed to
three parameters: re-order level, economic order quantity be fixed and known exactly. These are also called economic
and safety stock. lot size models or economic order quantity models.

Exercises
Practice Problems 1 Job 1 2 3 4 5 6

1. The process of determining the sequence of operation Processing time (days) 4 7 3 2 6 9

and allocation of facilities is known as Due date 12 20 4 5 18 25
(A) aggregate planning (B) scheduling
(C) routing (D) forecasting. 7. According to the shortest processing schedule, the last
flow time is
2. A work centre receives six job orders. The processing time (A) 12 days (B) 14 days
and weightage to be given are given in the table below. (C) 16 days (D) 18 days.
Job 1 2 3 4 5 6 8. In the above case, the average lateness is
(A) 1.3 days (B) 2 days
Processing time (hrs) 12 18 7 9 5 8
(C) 2.5 days (D) 3 days.
Weightage 1 1 2 1 3 1
9. The average number of jobs in the system at any point
The minimum mean flow time is of time is
(A) 18.8 hrs (B) 21.2 hrs (C) 23.4 hrs (D) 25.3 hrs. (A) 4.2 jobs (B) 3.8 jobs
(C) 3.2 jobs (D) 2.7 jobs.
3. In the VED analysis of inventory control, the classifica-
tion of the items is based on 10. For every job remaining in the work shop, the work-
(A) cost of the item shop incures a cost of H150/day. At a point of time, the
(B) criticality of the item workshop receives orders for 7 jobs whose details are
(C) availability of the item given below.
(D) size of the item. Job 1 2 3 4 5 6 7
4. In an assembly line wherein four persons are working in Processing time (days) 11 4 5 12 9 3 6
series (A, B, C, D), the time on an average taken by each is
Due date (days) 35 11 15 40 30 12 20
12 min, 10 min, 13 min, 9 min respectively. The balance
delay in the assembly line expressed in percentage is The minimum cost the workshop incurs is
(A) 16.8% (B) 15.4% (A) H25450 (B) H23250
(C) 12.3% (D) 8.6%. (C) H22150 (D) H19750.
5. A system consists of four components, each of which 11. A work shop has to schedule eight jobs received from
having an efficiency of performance 96%, 97%, 93% an order. The jobs, their processing time and due dates
and 80%. The inefficiency of the system is are as given below.
(A) 26.8% (B) 28.2% When the jobs are scheduled as per the shortest pro-
(C) 30.7% (D) 32.4%. cessing time, the tardiness is t1. When it is scheduled as
6. In a workshop, seven jobs arrive as job orders. They are per early due date basis, the tardiness is t2.
to be completed. The processing time of the jobs is as
given in table. Job 1 2 3 4 5 6 7 8
The details are shown below: Processing time (days) 12 6 7 3 11 8 5 4
Due date (days) 60 20 21 2 40 37 10 7
Job 1 2 3 4 5 6 7
Processing time (days) 9 7 11 4 2 6 5 t1
Then the ratio is
The minimum average flow time is t2
(A) 20 days (B) 24 days
(C) 26 days (D) 28 days. (A) 1 (B) 15 (C) 2 (D) 1.6.

Direction for questions 7 to 9: A job shop has to schedule Direction for questions 12 to 15: Following are the details
six jobs, the details of which are as follows. of six jobs for a workshop which are to be scheduled.
3.928 | Part III • Unit 8 • Industrial Engineering

Jobs 1 2 3 4 5 6 Direction for questions 17 and 18: The annual demand for
Processing time (days) 10 8 7 11 12 9
a product is 2,400 units. The cost of placing the order is
H100/order. The storage cost is 24% of the unit cost. The
Due date (days) 12 24 32 8 15 40
price break as proposed by the supplier is
12. When it is scheduled as per the shortest processing Qty Price/unit
time, the average tardiness is
(A) 20.32 days (B) 18.62 days 0 < 500, H10
(C) 16.83 days (D) 15.65 days. 500 < Q H9
13. The number of jobs, on an average, with the workshop 17. The economic order quantity is
at any point of time is (A) 500 (B) 447
(A) 5.23 (B) 4.87 (C) 4.23 (D) 3.19. (C) 471 (D) 480
14. When the jobs are arranged according to earliest due 18. The number of orders per year is
date and schedule, the average tardiness is (A) 6 (B) 5
(A) 12.86 (B) 13.67 (C) 14.12 (D) 15.22. (C) 3 (D) 2.
15. The average number of jobs in the system when sched- Direction for questions 19 and 20: For a product, the
uled as per the earliest due date criterion is annual consumption rate is 5000 units. Unit cost is H1. The
(A) 5.6 jobs (B) 4.8 jobs set up H cost for a batch is H12/run. Inventory carrying cost
(C) 4.2 jobs (D) 3.7 jobs. is 0.25/units/year.
16. A company requires raw material at the rate of 85000 From the records, the past lead times were founds to be
tonnes/annum. The cost of placing an order is on an 16 days, 14 days, 18 days, 13 days, 14 days.
average H1500/order. When the item reaches the stores 19. The economic batch size is
the holding cost/ton/year is H60. Then the economic (A) 842 units (B) 741 units
order quantity is (C) 693 units (D) 524 units
(A) 3410 t (B) 3075 t
order order 20. The Re–order level shall be
t t (A) 312 units (B) 279 units
(C) 2061 order (D) 1098 order (C) 242 units (D) 212 units

Practice Problems 2 4. By interpolation (regression method), the demand for a

product in a town where the population is 10 lakhs is
1. There are three components in the stores which are
parts of an assembly. Each of the components have Population in lakhs 5 7 8 11 14
95% service level in the stock. The proportion of time Series in thousands 9 12 11 14 18
during which there will be a shortage for assembling is
(A) 5% of the time (B) 15% of the time (A) 13.74 thousands (B) 14.08 thousands
(C) 20% of the time (D) 25% of the time. (C) 14.82 thousands (D) 15.32 thousands.
2. ‘Dependent demand’ item means 5. The demand for the product in thousands where the
(A) items which are very costly population is 20 lakhs is
(B) items which cannot be directly traced (A) 20.56 (B) 23.14 (C) 24.86 (D) 25.10.
(C) items which have derived demand Direction for questions 6 and 7: Seven jobs are to be
(D) items which cannot be singly obtained. scheduled against a single machine in a work shop. The jobs
3. In a job shop, at the beginning of a month, there are and their processing time together with the due dates of the
five jobs. Their processing time and weightage are job order are as given below.
shown in the chart below.
Job 1 2 3 4 5 6 7
Job 1 2 3 4 5
Processing time 10 8 6 7 12 14 18
Processing time (hrs) 8 5 9 6 4
Due day (days) 15 10 11 12 17 24 28
Weightage 1 2 2 1 3

The minimum mean flow time is 6. The sequence of working which will minimise the
(A) 17.32 (B) 16.81 (C) 15.26 (D) 14.67. maximum lateness is
(A) 2 – 4 – 1 – 3 – 6 – 5 – 7
Direction for questions 4 and 5: The population in five (B) 2 – 1 – 4 – 1 – 5 – 6 – 7
towns and the demand of a household product in the towns (C) 2 – 3 – 4 –1 – 5 – 6 – 7
are as follows. (D) 3 – 2 – 5 – 1 – 4 –3 – 7.
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.929

7. Maximum Lateness is (days) Job 1 2 3 4 5 6

(A) 16 (B) 26 (C) 33 (D) 45. Processing time (days) 4 2 9 5 3 5
Direction for questions 8 to 11: The processing time and Due date (days) 17 21 5 12 15 24
due dates for six jobs in a work shop are given below.
16. The production schedule that minimises the average
Job 1 2 3 4 5 6 flow time is
Processing time (days) 11 8 7 9 6 4 (A) 2 – 5 – 1 – 4 – 6 – 3 (B) 2 – 4 – 1 – 5 – 6 – 3
Due date (days) 32 27 19 30 12 6 (C) 2 – 6 – 1 – 3 – 4 – 5 (D) 3 – 2 – 4 – 6 – 1 – 5
17. The average lateness in the schedule is (in days)
8. According to the consideration of processing priority (A) 3.33 (B) 4.33 (C) 5.33 (D) 6.33.
as shortest processing time, the average job lateness is
(A) 3.24 days (B) 2.86 days 18. In the above scheduling, the average number of jobs in
(C) 2.43 days (D) 1.16 days. the system is
(A) 4.32 jobs (B) 3.41 jobs
9. The average number of jobs in the system is (C) 2.72 jobs (D) 1.76 jobs
(A) 4.31 jobs (B) 3.57 jobs
(C) 3.23 jobs (D) 2.84 jobs. Direction for questions 19 to 22: In a job shop, six jobs
10. For the same data above, from the consideration of arrive at a time. The set up of the shop is such that everyday
processing priority as earliest due date, the average job the job is with the shop; the shop incurs a cost of H100/day/
lateness is job. The jobs with their processing time and due dates are
(A) 1.16 days (B) 2.32 days given below.
(C) 2.84 days (D) 3.12 days
Job 1 2 3 4 5 6
11. The average number of jobs at hand is
Processing time (days) 5 3 8 2 6 9
(A) 4.12 (B) 3.92 (C) 3.57 (D) 2.82
Due date 10 12 18 9 7 9
Direction for questions 12 to 15: Consider the case of a job
shop which receives five job orders. The details of the jobs 19. The schedule which minimises the total cost is
regarding the processing time in days and due date in days (A) 4 – 2 – 1 – 5 – 3 – 6 (B) 4 – 1 – 5 – 2 – 3 – 6
are as given below. (C) 4 – 5 – 1 – 3 – 2 – 6 (D) 2 – 4 – 6 – 3 – 1.
Job Processing time Due date 20. In the case above, the total cost incurred which is mini-
1 9 16
mum is
(A) H8600 (B) H8800
2 7 20
(C) H9000 (D) H9500
3 5 25
21. The average tardiness in the process is
4 11 15
(A) 6.5 days (B) 5.3 days
5 6 40
(C) 4.8 days (D) 4.2 days.
12. With shortest processing time scheduling considera- 22. The average number of jobs at hand is
tion, the average lateness is (A) 3.42 jobs (B) 2.72 jobs
(A) 6.8 days (B) 7.2 days (C) 1.84 jobs (D) 1.12 jobs.
(C) 7.8 days (D) 8.3 days. 23. In ABC Analysis of inventory control, the major con-
13. With the shortest processing time scheduling, the aver- sideration is given for
age number of jobs in the system is (A) criticality of the item
(A) 3.2 jobs (B) 2.6 jobs (B) demand for the item
(C) 2.2 jobs (D) 1.8 jobs. (C) which consumes for money
14. For the same data furnished above, if the scheduling is (D) which are not easily available.
as per ‘earlier due date’ scheduling, the average late- 24. A company purchases an item from the market and
ness is sells it. It purchases the item according to the demand
(A) 5.2 (B) 4.8 (C) 3.6 (D) 3.1. for the item in the selling market. The demand is evalu-
15. Referring to the same data according to earlier due date ated to be 800000 pieces annually. The cost of storing
scheduling, the average number of jobs in the system is the procured item in the stores is H120/piece/year. The
(A) 5.41 (B) 5.2 (C) 4.61 (D) 3.37 cost of placing the order is H1200. The optimum quan-
tity to be procured in a batch is
Direction for questions 16 to 18: Six orders arrive at a job (A) 4000 prices (B) 36000 prices
shop which are to be processed by a single machine. The (C) 3200 prices (D) 3000 prices.
processing time and due dates of the job are as follows.
3.930 | Part III • Unit 8 • Industrial Engineering

25. In an assembly line, there are seven workmen doing 28. The minimum total cost for item x is
the work in series. They take time as 20 min, 25 min, (A) H8618 (B) H8112
17 min, 18 min, 22 min, 19 min, 21 min. The balance (C) H7956 (D) H7350.
delay for the assembly line is 29. The demand for an item is in a uniform rate of 300
(A) 18.8% (B) 17.6% units/year. The cost price of each item is H50. The
(C) 16.8% (D) 15.2%. inventory carrying cost/unit/year is H6. The set up cost
is evaluated to be H30/set up. The number of times in
Direction for questions 26 to 28: A company proposes to
an year the batch production must be made, for least
purchase 2 items ‘x’ and ‘y’ from two vendors. The order-
cost of production is
ing cost for both are H400 each. The unit price of item x is
(A) 4 (B) 5
H60 and that of item y is H80. The inventory carrying cost
(C) 6 (D) 7.
is 15% of the unit price/unit/year. The annual demands for x
and y are 10000 and 20000, respectively. 30. The demand for an item annually is 10000 units. The
ordering cost is H200 and the inventory carrying cost is
26. EOQ of an item x is
20% of the cost price. The unit price of the commodity
(A) 927 nos. (B) 943 nos.
is H100. If there is a penalty cost of H150 for the short-
(C) 1012 nos. (D) 1087 nos.
age, then the economic order quantity is
27. EOQ of an item y is (A) 523 (B) 476
(A) 1155 nos. (B) 1218 nos. (C) 412 (D) 365.
(C) 1326 nos. (D) 1372 nos.

Previous Years’ Questions

1. There are two products P and Q with the following 4. In an MRP system, component demand is:
characteristics: [2004]  [2006]
(A) forecasted
Demand Order cost Holding cost
Product (B) established by the master production schedule
(units) (H/order) (H unit/year)
(C) calculated by the MRP system from the master
P 100 50 4
production schedule
Q 400 50 1 (D) ignored.
The economic order quantity (EOQ) of products P 5. A manufacturing shop processes sheet metal jobs,
and Q will be in the ratio wherein each job must pass through two machines
(A) 1: 1 (B) 1: 2 (M1 and M2, in that order). The processing time (in
(C) 1: 4 (D) 1: 8. hours) for these jobs is: [2006]
2. A company has an annual demand of 1000 units, order- Jobs
ing cost of H100/order and carrying cost of H100/unit/ Machine
P Q R S T U
year. If the stock-out costs are estimated to be nearly M1 15 32 8 27 11 16
H400 each time the company runs out-of-stock, the
M2 6 19 13 20 14 7
safety stock justified by the carrying cost will be
 [2004]
The optimal make–span (in hours) of the shop is
(A) 4 (B) 20 (C) 40 (D) 100.
(A) 120 (B) 115 (C) 109 (D) 79.
3. The distribution of lead-time demand for an item is as
6. Consider the following data for an item. Price quoted
­follows: [2005]
by a supplier [2006]
Lead time demand Probability
Order quantity Unit
80 0.20
(units) price (H)
100 0.25
< 500 10
120 0.30
≥ 500 9
140 0.25
Annual demand: 2500 units/year.
The recorder level is 1.25 times the expected value of
the lead-time demand. The service level is Ordering cost: H100/order.
(A) 25% (B) 50% Inventory holding rate: 25% of the unit price.
(C) 75% (D) 100%. The optimum order quantity (in units) is:
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.931

(A) 447 (B) 471 12. A set of 5 jobs is to be processed on a single machine.
(C) 500 (D) ≥ 600. The processing time (in days) is given in the table
7. A stockist wishes to optimise the number of perish- below. The holding cost for each job is HK/day.
able items he needs to stock in any month in his store.  [2008]
The demand distribution for this perishable item is: Job Processing time
 [2006] P 5
Demand (in units) 2 3 4 5 Q 2
Probability 0.10 0.35 0.35 0.20 R 3
S 2
The stockist pays H70 for each item and sells each at
T 1
H90. If the stock is left unsold in any month, he can
sell the item at H50 each. There is no penalty for the A schedule that minimises the total inventory cost is
unfulfilled demand. To maximise the expected profit, (A) T-S-Q-R-P (B) P-R-S-Q-T
the optimal stock level is: (C) T-R-S-Q-P (D) P-Q-R-S-T.
(A) 5 units (B) 4 units
(C) 3 units (D) 2 units. 13. Six jobs arrived in a sequence as given below:[2009]
8. Capacities of production of an item over three con- Jobs Processing time (days)
secutive months in regular time are 100, 100 and 80 I 4
and in overtime are 20, 20 and 40. The demands over II 9
those 3 months are 90, 130 and 110. The cost of pro- III 5
duction in regular time and overtime are H20/item and
IV 10
H24/item, respectively. Inventory carrying cost is H2/
item per month. The levels of starting and final inven- V 6
tory are nil; backorder is not permitted. For minimum VI 8
cost of the plan, the level of planned production in
overtime in the third month is [2007] Average flow time (in days) for the above jobs using
(A) 40 (B) 30 (C) 20 (D) 0. shortest processing time rule is
(A) 20.83 (B) 23.16
9. The maximum level of inventory of an item is 100 (C) 125.00 (D) 139.00.
and it is achieved with infinite replenishment rate.
The inventory becomes zero over one and half month 14. The Annual demand for certain window frames is
because of the consumption at a uniform rate. This 10000. Each frame costs H200 and the ordering cost
cycle continues throughout the year. The ordering is H300/order. The inventory holding cost is H40/
cost is H100/order and the inventory carrying cost frame/year. The supplier is willing to offer 2% dis-
is H10/item/month. Annual cost (in H) of the plan, count if the order quantity is 1000 or more, and 4% if
neglecting the material cost, is [2007] the order quantity is 2000 or more. If the total cost is
(A) 800 (B) 2800 to be minimised, the retailer should [2010]
(C) 4800 (D) 6800. (A) order 200 frames every time
(B) accept 2% discount
10. In a machine shop, pins of 15 mm diameter are pro- (C) accept 4% discount
duced at a rate of 1000/month and the same is con- (D) order Economic Order Quantity.
sumed at a rate of 500/month. The production and
consumption continue simultaneously till a maximum Direction for questions 15 and 26: Four jobs are to be
inventory is reached. Then, the inventory is allowed to processed on a machine as per the data listed in the table.
reduce to zero becasue of consumption. The lot size
Processing time Due
of the production is 1000. If backlog is not allowed, Job
(days) date
the maximum inventory level is [2007]
1 4 6
(A) 400 (B) 500 (C) 600 (D) 700.
2 7 9
11. The net requirements of an item over five consecutive
3 2 19
weeks are 50-0-15-20-20. The inventory carrying cost
and ordering cost are H1/item/week and H100/order, 4 8 17
respectively. The starting inventory is zero. Use ‘least
unit cost technique’ for developing the plan. The cost 15. If the earliest due date (EDD) rule is used to sequence
of the plan (in H) is [2007] the jobs, the number of jobs delayed is [2010]
(A) 200 (B) 250 (C) 255 (D) 260. (A) 1 (B) 2 (C) 3 (D) 4.
3.932 | Part III • Unit 8 • Industrial Engineering

16. Using the shortest processing time (SPT) rule, total (A) 4.5 days (B) 4.5 months
tardiness is [2010] (C) 6.8 days (D) 6.8 months.
(A) 0 (B) 2 (C) 6 (D) 8. 21. Demand during the lead time with associated prob-
17. The word kanban is most appropriately associated abilities is shown below: [2014]
with [2011]
Demand 50 70 75 80 85
(A) economic order quantity
(B) just-in-time production Probability 0.15 0.14 0.21 0.20 0.30
(C) capacity planning
Expected demand during the lead time is _____.
(D) product design.
22. Annual demand of a product is 50,000 units and the
18. A component can be produced by any of the four pro-
ordering cost is `7000 per order. Considering the basic
cesses I, II, III and IV. The most economical process
economic order quantity model, the economic order
for producing a batch of 100 pieces is [2014]
quantity is 10,000 units. When the annual inventory
Fixed cost Variable cost per cost is minimized, the annual inventory holding cost
Process
(in H) piece (in H) (in `) is ______. [2015]
I 20 3 23. The annual requirement of rivets at a ship manufac-
II 50 1 turing company is 2000 kg. The rivets are supplied in
III 40 2 units of 1 kg costing `25 each. If it costs `100 to place
IV 10 4 an order and the annual cost of carrying one unit is
9% of its purchase cost, the cycle length of the order
(A) I (B) II (C) III (D) IV. (in days) will be ______. [2015]
19. Consider the following data with reference to elemen- 24. The annual demand for an item is 10,000 units. The
tary deterministic economic order quantity model: unit cost is `100 and inventory carrying charges are
 [2014] 14.4% of the unit cost per annum. The cost of one
procurement is `2000. The time between two con-
Annual demand of an item 100000 secutive orders to meet the above demand is ______
Unit price of the item (in H) 10 month(s). [2016]
Inventory carrying cost per unit per year (in H) 1.5 25. A food processing company uses 25,000 kg of corn
Unit order cost (in H) 30 flour every year. The quantity-discount price of corn
flour is provided in the table below:
The total number of economic orders per year to meet
Quantity (kg) Unit price (`/kg)
the annual demand is _____.
1–749 70
20. A manufacturer can produce 12000 bearings per
day. The manufacturer received an order of 8000 750–1499 65
bearings/day from a customer. The cost of holding a 1500 and above 60
bearing in stock is H0.20/month. The set-up cost per
production run is H500. Assuming that there are 300 The order processing charges are `500/order. The
working days in a year, the frequency of production handling plus carry-over charge on an annual basis
run should be [2014] is 20% of the purchase price of the corn flour per kg.
The optimal order quantity (in kg) is _______.[2016]
 Chapter 3 • Material Requirement Planning and Inventory Control | 3.933

Answer Keys
Exercises
Practice Problems 1
1. C 2. A 3. B 4. B 5. C 6. A 7. B 8. A 9. D 10. B
11. A 12. C 13. D 14. B 15. D 16. C 17. A 18. B 19. C 20. B

Practice Problems 2
1. B 2. C 3. D 4. A 5. B 6. C 7. D 8. D 9. B 10. A
11. C 12. A 13. B 14. C 15. D 16. A 17. B 18. C 19. A 20. C
21. A 22. B 23. C 24. A 25. A 26. B 27. A 28. D 29. C 30. B

Previous Years’ Questions

1. C 2. C 3. D 4. C 5. B 6. C 7. B 8. B 9. D 10. B
11. D 12. A 13. A 14. C 15. C 16. D 17. B 18. B 19. 49 to 51
20. C 21. 74 to 75 22. `34,000 to 36,000 23. 76 to 78 24. 2 25. 1500